S&P Dow Jones Indices has announced that Amazon.com Inc. (NASD: AMZN) will replace Walgreens Boots Alliance Inc. (NASD: WBA) in the Dow Jones Industrial Average. The change will take effect before the US market opens on Monday, February 26. You may refer to their press release for the reasons.
One strategy we teach is a trend-following approach applied to the Dow Jones Industrial Average component stocks. With this change, we need to update the model files. I have already done this and uploaded the new files to the Learning Management System for the benefit of our students.
Usually, whenever there is a change in the component stocks of any index, we can expect outflows from the outgoing stock and inflows to the incoming stock. This is because many fund managers who benchmark themselves to the index would need to rebalance their portfolios to match the index.
The good news is that our trend-following model is not holding Walgreens Boots Alliance shares. The pre-market quote for the stock indicates a drop of about 3% when the US market opens. On the other hand, Amazon shares are up about 1.2% pre-market. However, this is after it dropped 1.4% in the previous session. Amazon is in an uptrend, and the model is showing a hold on the stock. Therefore, the only difference in portfolio composition is an additional position in Amazon.
Under the Global Industry Classification Standard (GICS), Walgreens is classified under the consumer staples sector, whereas Amazon is classified under consumer discretionary. Amazon can be viewed as a technology company but let's go with the official classification. With these component changes, the sector composition of the index has changed slightly, as shown below.
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