Stupid question: Why was Nvidia able to join the Dow Jones index?

S&P Dow Jones announced Friday that Nvidia and The Sherwin-Williams will replace Intel and Dow Inc, respectively, in the Dow Jones index effective November 8. The advent of the king of GPUs for AI is not really a surprise. That of the specialist in technical paintings a little more, but we will not talk about it here because we have entrusted the task of painting the portrait of the painter to my colleague Arthur Kuntz.

What are the criteria for inclusion in the Dow Jones?

The inclusion of a company in the Dow Jones Industrial Average (DJIA) index is an achievement for companies listed in the United States. Wall Street’s oldest index only has 30 stocks and its changes are relatively rare (7 over the last 15 years). Inclusions and exclusions are subject to several criteria, not all of which are explicitly defined because the selection is partly subjective (no real numerical criteria, apart from the price) and carried out by a special committee of S&P Dow Jones Indices. Here are some criteria:

• The company enjoys a “excellent reputation“
• It shows sustained growth
• It is of interest to a large number of investors
• It ensures the maintenance of sectoral representation “adequate“
• It must be incorporated and have its head office in the United States, and must carry out “a large part” of his income
• It is not part of the Transport (GICS code 2030) or Community Services (GICS code 55) sectors.
• The most expensive stock in the index must not have a price more than ten times higher than the cheapest stock.

The right price

The Dow Jones is an index weighted by price, an incongruity in modern times, and not by capitalization. Based on the current price of 135 USD, Nvidia and its 3,321 billion dollars in capitalization would enter 9^e position in the index, while The Sherwin Williams, with its 358 USD share price and its 90 billion dollars capitalization, would be 6^e. This is the magic of price indices! Currently, the most influential stock in the Dow is UnitedHealth ($567), ahead of The Goldman Sachs Group ($519) and Microsoft ($410).

The market had speculated on Amazon’s entry into the Dow Jones in 2022, after a “split”. The stock was finally added in early 2024, at the expense of Walgreens Boots (which had ousted General Electric in 2018). In the technology sector, Microsoft and Intel joined the index in 1999, becoming the first securities listed on Nasdaq to be part of the Dow. Apple had to wait until 2015 (instead of AT&T).

Nvidia had become a legitimate candidate

The meteoric rise of Nvidia, manufacturer of graphics cards for gamers to star processors for crypto and then for AI, made the stock a natural candidate for the Dow Jones. So much so that financiers were no longer wondering if the company was going to enter, but when. At the same time, Intel’s pronounced decline put the stock at risk within the index. The substitution was therefore probable.

The arrival of the engine of growth in the technology sector for several years certainly comes late, but it could allow the venerable index to deviate less from the S&P500 and the Nasdaq during periods very favorable to Californian stars.