Nvidia shares enter the Dow. Is it time to buy?

Whether your favorite cliché is “Talk about expensive purchases” or “Better late than never”: Nvidia (NVDA) will finally replace Intel (INTC) in the Dow Jones Industrial Average.

Oh, and by the way, Dow (DOW) also gets the starting signal. It trades from the venerable blue-chip average Sherwin Williams (SHW). The NVDA and SHW changes will occur before the market opens on November 8th.

As much interest as such events generate, being tapped into the Dow is more symbolic than material. After all, the S&P 500 is the most important measure of the performance of US stocks. That is why many trillions of dollars are invested in products that replicate the index.

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For example, the largest exchange-traded fund (ETF) in the world, the SPDR S&P 500 ETF Trust (SPY) alone manages more than $590 billion in assets. A comparable product for the DJIA, the SPDR Dow Jones Industrial Average ETF Trust (DIA) has less than $39 billion in assets under management.

Also note that unlike the S&P 500 or the Nasdaq Composite, the Dow is weighted by price, not market capitalization. Although Nvidia has an outsized influence on the moves of the cap-weighted benchmarks, NVDA stock will be about as important to the DJIA at current prices as 3M (MMM).

In addition, it would have been nice if the guardians of the Dow had made this move sooner rather than later. Once Nvidia has split its shares Last spring it matched the Dow well.

Intel, on the other hand, has been weighing on the Dow for decades.

In fact, NVDA long ago overtook INTC as a credible representative of the semiconductor sector in a concentrated portfolio. (Remember that the Dow only includes 30 stocks.)

While it's true that the pre-split of the stock price essentially eliminated NVDA from being eligible for Dow membership, it's impossible not to look back at the charts and wonder what could have been. The bottom line is that the Dow would be higher today if NVDA had been a component and not INTC.

Nvidia in the long term

As we discovered, anyone who sets it can Invest $1,000 in Intel stock 20 years ago their capital was destroyed. Nvidia, on the other hand, was one of the largest wealth creators of the last few decades. Take a look at what Invested $1,000 in Nvidia shares 20 years ago it would be worth it today. If you want a time machine, you are not alone.

Suffice it to say that the DJIA's performance would have been better with Nvidia. But that wasn't possible. So is it better late than never?

That's harder to say. Normally you want to buy cheaply. In terms of price, Nvidia has increased by 178% so far this year. Heck, shares are up nearly 30% in the last three months. There's another Wall Street cliché about making easy money already. And it is always true that past performance is no guarantee of future results.

However, the DJIA is certainly more representative of what it is intended to represent with NVDA than with INTC. But aside from the imprimatur of the Dow's editors, nothing fundamental has changed.

That fact alone should be a huge comfort to the Nvidia bulls, of whom there are legions on the street. Of the 62 analysts providing opinions on NVDA stock, surveyed by S&P Global Market Intelligence48 rate it a Strong Buy, 10 say Buy and four call it Hold. That makes for a rare Strong Buy consensus recommendation. In fact, Nvidia regularly tops the list Analysts' top S&P 500 stocks to buy.

To the question of whether you should increase your exposure to Nvidia stock due to its inclusion in the Dow, the answer is no. If you own diversified funds or ETFs that track the S&P 500, the Nasdaq Composite, or the Nasdaq-100, for example, you already own Nvidia – and that's probably enough.

As exciting and enviable as Nvidia's position in artificial intelligence (AI) may be, it is ultimately a chip maker. The chip industry is cyclical and no stock has ever risen in a straight line.

Nvidia shares enter the Dow. Is it time to buy?

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