By Timothy J. Videnka, CFA, CFP®
“I refuse to join any club that would have me as a member”
If you’ve followed the financial news recently, you may have seen that the Dow Jones Industrial Average has a new member. Alphabet, Google’s parent company, has replaced Verizon in the 30-stock index.
Whenever there’s a change to an index as storied as the Dow, it generates plenty of headlines. However, I think the more interesting story isn’t who was added or removed – it’s how the Dow works in the first place.
Most people assume the largest companies have the biggest impact on the Dow. Surprisingly, that’s not the case.
The Dow is a price-weighted index, which means a company’s influence or impact is based on the price of a single share of stock, not the size of the company itself. Let’s make this real and look at the DJIA constituents ranked by weight in the index and, just for fun, add their market capitalizations. (The table below is before Alphabet replaced Verizon on June 29, 2026.)
Goldman Sachs and Caterpillar have the largest impact on the DJIA. That’s very different from the S&P 500, which is the benchmark most referenced when discussing the U.S. stock market.
The S&P 500 is market capitalization-weighted, meaning a company’s weight is based on the total equity value: its share price multiplied by the number of shares outstanding. That’s why companies like Apple, Microsoft, NVIDIA, Amazon and Alphabet represent larger portions of the index. Their influence reflects their economic size rather than simply the price of an individual share. The table below shows the top 30 holdings of the S&P 500 index sorted by index weight.
Index Committees: S&P Dow Jones Indices vs. S&P 500
Another interesting difference is how these indexes evolve over time. The Dow is maintained by a committee at S&P Dow Jones Indices. That committee periodically reviews the 30 companies and makes changes when it believes the index no longer reflects the leadership of the U.S. economy. Those decisions are inherently subjective and are intended to keep the Dow representative of America’s most influential blue-chip companies. That’s why Verizon was replaced by Alphabet: the committee believed the change better reflects today’s economy and the growing importance of technology and artificial intelligence.
The S&P 500, while also overseen by an index committee, follows a much more rules-based framework. Companies must meet specific criteria related to market capitalization, liquidity, public float, profitability, and U.S. domicile before they are even eligible for inclusion. The committee’s role is largely to apply those established standards and ensure the index continues to represent the large-cap U.S. equity market rather than selecting companies based on popularity and qualitative assessments.
The decision to replace Verizon with Alphabet reflects an opinion on how the U.S. economy continues to evolve. Technology, cloud computing, artificial intelligence, and digital advertising have become increasingly important drivers of economic growth, and the Dow Jones Industrial Average has chosen to reflect the change.
Index Committees Are Not Fiduciaries
Another important consideration is risk control. Neither the Dow’s price-weighted methodology nor the S&P 500’s market capitalization-weighted methodology is designed with portfolio risk management as a primary objective. In the Dow, a higher-priced stock (think Goldman Sachs or Caterpillar) automatically carries more influence regardless of the company’s overall size or fundamentals, meaning a handful of high-priced stocks can disproportionately drive the index’s performance. The S&P 500, while broader and generally more representative of the U.S. market, can also become increasingly concentrated (top 10 holdings represent ~40% of market value) as its largest companies grow and occupy a larger share of the index as is currently the case.
For investors, that highlights an important distinction between an index and a portfolio. An index is intended to measure a market segment, not manage investment risk. That’s why we place a strong emphasis on position sizing. At Forza, rather than allowing any single holding to dominate a portfolio, we seek to keep individual stock positions below 5%. This disciplined approach helps reduce undue position size risk and ensures that no single company – regardless of its popularity, share price or index inclusion – can have an outsized impact on a portfolio.