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Why the Dow Reshuffle Matters

Tech is in, oil is out, and it’s high time to rebalance, UBS argues.

The remixing of the Dow Jones Industrial Average should signal the need to make room for technology themes in portfolios, even for investors who prefer other indexes, according to UBS Global.

“The shuffle highlights the importance of diversification in ensuring that investors are well exposed to the winners in a post-Covid-19 world,” UBS’s chief investment office said in a research note dated August 31. The bank pointed to renewable energy, technology disruption, 5G networks, and health-care tech as winning themes over the long term. 

The changing landscape for investors was underscored by oil giant ExxonMobil Corp. — the oldest member of the Dow index — getting booted from the Dow index to prepare for Apple’s recently announced four-to-one stock split that took effect in trading Monday. Most professional investors use the Standard & Poor’s 500 as their go-to benchmark. The basket of stocks has been trading around record highs along with others such as the Nasdaq and MSCI ACWI, according to UBS.

That makes rebalancing portfolios particularly important, UBS said, as investors should seek to shift away from expensive stocks and into those “well-placed to lead the next move up.”

Health care is one such area poised for profitable advances in technology. The industry remains one of the world’s least digitalized even as it produces five percent of the world’s data, according to the investment research note. 

“Over the next decade, we expect a set of data-driven technologies, such as robotic surgery and artificial intelligence-assisted diagnostic imaging to make health care more effective, efficient and accessible,” UBS said. “We also see opportunity in genetic therapies which could revolutionize the way we deliver health care.”

Within the theme of tech disruption, UBS favors companies exposed to trends including the cloud, big data, and artificial intelligence. Tech and tech-enabled companies have gained market share “at the expense of incumbent competitors in various industries” during the pandemic, the bank’s chief investment office has said.

As part of the Dow’s reshuffling, announced August 24, cloud services provider, biotech firm Amgen and industrial conglomerate Honeywell International joined the index. They replaced industrial conglomerate Raytheon Technologies Corp. and pharmaceutical company Pfizer, which on Monday fell out of the Dow along with ExxonMobil.

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“Chevron will be the only energy company left on the Dow,” UBS noted. Energy demand is rising amid increasing population growth, and governments globally are investing in green energy in an effort to recover from the economic downturn caused by Covid-19, according to the bank’s chief investment office.

In a “tiny move” for the electric car industry, UBS said in Monday’s note that Honda Motor Co. is “scaling up its first ever mass-produced electric vehicle, with an ultra-compact offering meant strictly for city driving.” At least for now, Honda is keeping outside the U.S. and Chinese auto markets and sticking to “the narrow city streets of Europe and Japan where it will sell.” 

As for the next generation of cellular networks known as 5G, UBS said they will provide a wireless connection that’s 20 times faster than 4G but predicted a bifurcated market split by the U.S. and China over tech conflicts. 5G represents opportunities for investors as it will enable “a multitude of emerging technologies over the next decade,” according to the note. 

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