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Why Amazon was a 'natural selection' to join the Dow

Amazon (AMZN) is set to join the Dow Jones Industrial Average (^DJI), taking the place of Walgreens Boots Alliance (WBA) starting on February 26th. S&P Dow Jones Indices cited Walmart's (WMT) 3-for-1 stock split as one of the reasons behind the change.

S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt joins Yahoo Finance to give insight into the change and what it means for investors everywhere.

Silverblatt elaborates on the reasoning for the change: "S&P does not change the index too often. It's been about 60 changes in 127 years, so change is a major item, a major consideration. At this point, the thinking... is obviously the economy and the markets have changed and we needed additional exposure and Amazon offers that exposure at this point in time. Also, Walgreens has somewhat declined in stock price so since its price-weighted, it doesn't have that much of an impact on there. If you wanted to stay in that field ,you'd have to find a higher priced stock in there. We also had Walmart's 3-for-1 stock split that reduced the weighting within the index. So again, the index needs to stay relevant and reflect the higher end of the US markets."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

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Editor's note: This article was written by Nicholas Jacobino

Video transcript

SEANA SMITH: The Dow Jones Indices stirring up the makeup of the Dow Jones Industrial average. Amazon set to join the index, taking the place of Walgreens Boot Alliance, that change takes effect prior to the open of trading on Monday, February 26. Now here to discuss the methodology behind it, what it means for that average investor. We want to bring in Howard silverblatt, he's S&P, Dow Jones Indices, a senior index analyst. Howard, it's great to see you here. So just talk about the significance of this change, and what it means to the average investor out there just in terms of their industry exposure, going forward.

HOWARD SILERBLATT: Well, there's only 30 issues, it's not the S&P 500. And we do not change the index, S&P does not change the index too often. There's been about 60 changes in 127 years, so a change is a major item a major consideration at this point. The thinking, basically, is obviously the economy, and the markets have changed, and we needed additional exposure. And Amazon offers that exposure at this point in time.

Also Walgreens has somewhat declined in stock price. So since it's price weighted doesn't have that much of an impact on that, if you wanted to stay in that field, you'd have to find a higher priced stock in there. We also had Walmart's 3-for-1 stock split that reduced the weighting within the index. So, again, the index needs to stay relevant and reflect the higher end of the US markets on here.

And Amazon was a natural selection at this point. Consumers, enterprise, different areas, the exposure that it gives to the index. For the average investor it'll mean that the index itself is more reflective of consumer selections at this point in time. And that happens on a regular basis, to some degree. Amazon is no different than when we put Sears Roebuck in the 1920s. It's still a retail where consumers are going. By the way, Sears was taken out in 1999 for a company called Microsoft.

Again, the index needs to be relevant. We do not like to change the memberships in there. We prefer the consistency, but at times it has to be done, because as the economy changes, the index has to change.

BRAD SMITH: When you have a company like Amazon that is a beneficiary of so many different segments within its business, whether that's Cloud, or whether that's its investments, or its play in AI, or the consumer and strength or resiliency of the consumer, that relevancy also can lead to being lighter fluid when they are especially beneficiary of so many different areas, and potentially propel the Dow to what, 40k very soon as well. And so what type of relevancy, as you make these changes, as we consider in the market's digest these changes, how does that propel us toward some of those other all-time highs as well for the Dow?

HOWARD SILERBLATT: Well, in this case, the actual mechanics of the split, and adding Amazon, actually did increase the target price, that's the estimate for one year, not from S&P, but on the street. We do not choose stocks, based on whether we think they're going to be going up or down. Actually went up to over 42,000 for the one year from the 41,000.

As far as the Amazon makeup, yes, some of the other fields that it's getting its sales from, and some of its profits that are still growing, is somewhat of a plus, because it's developing and giving you a bit of exposure in a few other fields where we would have wanted to increase on it. But mostly, you're dealing with the consumer sector, the retail sector, where the bulk of it is in right now. And that's positive, because the consumer is the biggest part of the economy in there. And, again, at this point in time, we're better able to reflect it.

And again, the 3-for-1 stock split was kind of the catalyst to the event at this point in time, it wasn't the major reason. You're always reviewing what's in and what's not in the index. And, again, you try not to do a lot of changes. So you really need a reason to be taken out to some degree, such as a merger, or a deterioration, or irrelevant in your price.