Exxon Mobil’s been in the Dow in some form since 1928, but its tenure as the longest-serving component is coming to an end.
On Monday, S&P Dow Jones Indices announced the largest changes to the 30-stock benchmark in seven years. Along with Exxon, which is being replaced by Salesforce, Pfizer and Raytheon Technologies are being removed in favor of Amgen and Honeywell International. The changes take effect Aug. 31, Cnbc reports.
Exxon’s removal is a “sign of the times,” Raymond James said, as the company — and energy sector broadly — falters, a weakness made all the more apparent by strength in technology names.
Energy now makes up just 2.5% of the S&P 500, compared with 6.84% five years ago, and 10.89% 10 years ago. Technology has jumped from 18.48% of the index in 2010 to 28.17% today.
Edward Jones’ Jennifer Rowland noted that five tech stocks — Apple, Microsoft, Amazon, Alphabet and Facebook — are individually larger than the entire U.S. energy sector, which she called “pretty sobering” and “symbolic of just how far the energy sector has fallen over the past few years.”
Chevron is also in the Dow, meaning the energy sector was overrepresented in the benchmark to begin with. And with Apple’s coming 4-for-1 stock split, the Dow’s exposure to tech was set to decrease.
“In removing Exxon from the DJIA, the index provider is clearly being reactive, and indeed accentuating the extremely negative investor sentiment on just about anything tied to oil and gas,” Raymond James’ Pavel Molchanov wrote in a note to clients.
Exxon shares fell 3% on Tuesday after news of the removal.
“This represents a combination of the obviously rough COVID-impacted oil price backdrop but also concerns about the eventual peak in oil demand (which had emerged long before COVID) and ESG-related objections to fossil fuels generally,” he added. That said, Raymond James is upbeat on the sector and envisions recovery into 2021.
Over time the S&P 500 has surpassed the Dow in importance given that it better reflects the market and economy. Not only does it contain hundreds of additional stocks, it’s also market-cap weighted, which means that larger companies have a greater influence. The Dow, on the other hand, is price weighted.
Roughly $24 billion in actively managed funds tracks the Dow, dwarfed by the more than $300 billion following the S&P 500, according to data from Goldman Sachs. The gulf in passively managed funds tracking each one is even deeper.