SPY – QQQ – DIA: The AMAZON case to understand the differences between stock indices

Finally, AMAZON arrives on the Dow Jones (DIA), more than 25 years later than the Nasdaq 100 (QQQ, in 1998). It took 7 years (2005) for the S&P 500 (SPY) to include it in its index.

The time difference makes it possible to explain the differences between the returns and risks of the indices, based on the criteria used to update them.

AMAZON made it first to the Nasdaq 100 because this index is determined by the market. When a company’s market capitalization ranks it among the 100 most valuable companies on the Nasdaq, it enters the index.

Once a year, at least, it is rebalanced to adjust it to market decisions.

Instead, SPY and DIA rely on the decisions of their Committees based on rules that consider factors in addition to market value.

Hence the delays, of 7 and 25 years, which impacted the returns achieved by investors in SPY and DIA.

Let’s take a look at an excerpt from Josh Schafer’s  article  on yahoo! Finance.

The interview with Howard Silverblatt of S&P Dow Jones Indices is very revealing.

The Dow Jones Index has become less outdated.

Amazon will replace Walgreens Boost Alliance in the benchmark. The change will take effect before the market opens on Monday, Feb. 26.

«The index needs to remain relevant and reflect the top end of U.S. markets, and Amazon was a natural pick,» Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told Yahoo Finance Live.

He added: «For the average investor, it will mean that the index better reflects consumer selections at the moment.»

The swap of tech giant Amazon for Walgreens adds exposure to a variety of areas for the index. Amazon’s wide range of industries, including cloud computing, artificial intelligence, healthcare, and e-commerce, far exceeds the reach of the traditional pharmacy brand at Walgreens. This, Silverblatt said, was crucial in influencing change.

«[Amazon is] developing and giving you exposure to some other fields,» Silverblatt said. «But mostly it’s about the consumer, the retail sector, where most of [Amazon] is right now. And that’s a good thing because the consumer is the biggest part of the economy.»

Silverblatt noted that unlike the S&P 500, which rebalances every quarter, the Dow doesn’t reorganize the 30 companies within its index frequently. In the Dow’s 120-year history, there have only been 60 changes, according to Silverblatt.

One of the reasons a company may be removed from the index is if its stock price deteriorates and becomes less relevant to the overall index. Walgreens has seen it recently with shares down nearly 70% over the past five years, while Amazon is up more than 100% in that same time period.

Walgreen’s stock has plunged notably as more shoppers move to online options like Amazon. 

«We don’t like to change members for consistency, but sometimes you have to because as the economy changes, the index has to change,» Silverblatt said.

Amazon is now the third of the «Magnificent Seven» tech stocks to be added to the Dow, joining the likes of Apple and Microsoft.

Those seven stocks, which also include Google, Meta, Tesla and Nvidia, have helped propel the S&P 500 to a 24% gain over the past year. Meanwhile, the Dow Jones is up 16% in the same time period.

Only three of the seven are on DIA.

But let’s also highlight what happened with the most active companies in the market these days: Tesla and Nvidia.

Tesla entered the Nasdaq 100 in 2013, and only made it to SPY in 2020. Again, 7 years apart.

Nvidia has been part of QQQ since 2012, and joined SPY in 2017.

The differences between stock indices are plain to see. How you decide to integrate them has a profound impact on your returns and risks.

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