Whether your preferred cliche is "talk about buying high" or "better late than never," Nvidia (NVDA) will at long last replace Intel (INTC) in the Dow Jones Industrial Average.
Oh, and by the way, Dow (DOW) is getting the boot too. It will be swapped out of the venerable blue-chip average for Sherwin-Williams (SHW). The NVDA and SHW changes will take place before the market opens on November 8.
As much interest as such events generate, being tapped for the Dow is more symbolic than material. After all, the S&P 500 is the main benchmark for U.S. equity performance. That's why many trillions of dollars are invested in products that track the index.
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For example, the largest exchange-traded fund (ETF) in the world, the SPDR S&P 500 ETF Trust (SPY), has more than $590 billion in assets under management alone. A comparable product for the DJIA, the SPDR Dow Jones Industrial Average ETF Trust (DIA), holds less than $39 billion in assets under management.
Also know that, unlike the S&P 500 or the Nasdaq Composite, the Dow is weighted by price rather than by market cap. Although Nvidia has an outsized influence on the movements of the cap-weighted benchmarks, at current prices NVDA stock will be as important to the DJIA as, roughly, 3M (MMM).
There's also the fact that it would have been nice if the keepers of the Dow had made this move sooner rather than later. Once Nvidia split its stock last spring, it became a good fit for the Dow.
Intel, on the other hand, has been dead weight on the Dow for decades.
Indeed, NVDA lapped INTC a long time ago as a credible representative of the semiconductor sector in a concentrated portfolio. (Recall that the Dow comprises just 30 stocks.)
True, NVDA's share price pre-split made it essentially ineligible for Dow membership, but it's impossible not to look back at the charts and wonder what could have been. The bottom line is that the Dow would be higher today had NVDA been a component rather than INTC.
Nvidia for the long run
As we have noted, anyone who put $1,000 into Intel stock 20 years ago has endured a destruction of their capital. Nvidia, on the other hand, has been among the greatest wealth creators of the past several decades. Have a look at what $1,000 invested in Nvidia stock 20 years ago would be worth today. If you wish you had a time machine, you are not alone.
Suffice to say the DJIA's performance would have been better with Nvidia in it. But that wasn't possible. So, is this better late than never?
That's harder to say. Ordinarily, one wants to buy low. Nvidia is up 178% so far this year on a price basis. Heck, shares have gained nearly 30% over the past three months. There's another Wall Street cliche about the easy money already having been made. And it is always true that past performance is not a guarantee of future results.
Either way, the DJIA is certainly more representative of whatever it's supposed to represent with NVDA in it rather than INTC. But apart from having the imprimatur of the editors of the Dow, nothing fundamental has changed.
This fact by itself should be of enormous comfort to Nvidia bulls, of which there are legions on the Street. Of the 62 analysts issuing opinions on NVDA stock surveyed by S&P Global Market Intelligence, 48 rate it at Strong Buy, 10 say Buy and four call it a Hold. That works out to a rare consensus recommendation of Strong Buy. Indeed, Nvidia routinely makes the list of analysts' top S&P 500 stocks to buy.
As to whether you should add to your exposure to Nvidia stock based on its inclusion in the Dow, the answer is no. If you own diversified funds or ETFs tracking, for example, the S&P 500, Nasdaq Composite or Nasdaq-100, you already own Nvidia – and it's probably enough.
As exciting and enviable as Nvidia's position in artificial intelligence (AI) may be, it is ultimately a chip maker. The chip industry is cyclical, and no stock has ever gone up in a straight line.
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