NVIDIA included in the Dow Jones Industrial Average, what impact will it have on the Dow Jones?

Nvidia announced last week that it will conduct a 10:1 stock split, which will reduce its stock price from over $1000 to around $100 after completion.

Immediately, speculation arose that Nvidia's move may be aimed at joining the Dow Jones Industrial Average.

Since Nvidia's stock price had already approached $1000, inclusion in the Dow would cause a significant deviation in the index (the highest-priced component stock in the Dow, UnitedHealth Group, is around $500 per share, only half of Nvidia's price). However, this issue would not exist after the stock split.

The criteria for Dow component selection include "having a good reputation, demonstrating sustained growth, and attracting significant investor attention," with industry representation also being an important consideration. As a leading global chip giant, Nvidia clearly meets these criteria.

Considering only stock price ranking, Nvidia's impact on the Dow is not significant

As the oldest blue-chip stock index on Wall Street with a history of 128 years, the Dow is one of the most important indicators of the U.S. stock market, consisting of 30 blue-chip stocks.

Unlike the S&P 500 index, which uses market capitalization weighting, the Dow Jones index is a price-weighted index, meaning that component stocks with higher stock prices have a greater weight in the Dow and a greater impact on the index.

Assuming there are two Dow component stocks, Stock A priced at $100 and Stock B priced at $10, and both stocks have increased by $1: Stock A rises to $101, a 1% increase, while Stock B rises to $11, a 10% increase. This means that a 1% increase in Stock A is equivalent to a 10% increase in Stock B in terms of its impact on the Dow.

Currently, a $1 change in the price of any Dow component stock leads to an index movement of approximately 6.6 points.

If Nvidia is included in the Dow, based on market capitalization, it would be the third-largest company in the index after Microsoft and Apple. However, considering the impact of the 10:1 stock split, with a stock price of $100, it would rank 22nd among Dow component stocks by price, meaning its post-split stock price would not have a significant impact on the Dow.

What does Nvidia's $3 daily volatility mean for the Dow?

Nevertheless, when considering stock price volatility, Nvidia's overall impact on the Dow should not be underestimated.

Based on media estimates of Nvidia's expected daily volatility, post-split, Nvidia's impact on the Dow would rank 9th among the index's component stocks. Nvidia's daily volatility is around $3, comparable to Boeing and Amazon, the two most recently added component stocks in the Dow. This calculation uses past year daily return data to estimate expected daily volatility.

Furthermore, while stock splits may have limited impact on company fundamentals and stock investors (especially with fractional share trading and ETFs), they may have some impact on the options market, particularly for retail investors The lower stock price may lower the threshold for options trading of popular stocks (such as NVIDIA), attracting more investors to participate.

Goodbye, Intel?

Media analysis points out that if NVIDIA is included in the Dow Jones Industrial Average after the stock split, it is highly likely to replace the industry leader Intel in the chip industry.

Currently, Intel only accounts for 0.5% of the Dow Jones Industrial Average, making it the component stock with the lowest weight in the index. In terms of industry representation, the current global chip industry leader NVIDIA is obviously more in line with the selection criteria of the Dow Jones Industrial Average than the traditional chip giant Intel.

The stock split of NVIDIA will be completed after the U.S. stock market closes on June 7 (Friday), and trading will be conducted based on the post-split price starting from Monday (June 10). Media speculates that NVIDIA may be included in the Dow Jones Industrial Average in the second half of this year or in 2025.