How Kraft's Entry Affects the Dow

The maker of cheese and Oreos brings diversification to the table.

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Former insurance giant AIG is getting booted from the Dow indexes "due to financial distress" in the markets, Dow Jones said in a statement. AIG's time spent in the Dow was the shortest of any company since the Great Depression. Effective Monday, Kraft will take its place in the index, making it the first food-focused company to be included in more than two decades. AIG was added to the Dow in 2004.

"We are refraining at this point from adding another stock in the financial industry because of the extremely unsettled conditions. We realize this decision leaves the Dow Jones industrial average under-weighted in financials, and we will address this situation in due course," Robert Thomson, managing editor of the Wall Street Journal, said in a statement.

The Kraft addition is also notable because critics complained that the index had become too heavy in financials earlier this year when Bank of America was added, says Frank Ingarra, co-portfolio manager of the six funds that make up the Hennessy family. A couple of the funds invest solely in Dow stocks (more specifically, the 10 highest-yielding stocks in the index, in what's called a "Dogs of the Dow" strategy).

Editors of the Wall Street Journal pick the stocks comprising the DJIA. The selection process is subjective, so there are no hard-and-fast criteria, other than industry-leading U.S. companies.

Says Ingarra: "We were surmising that maybe they would put in a different insurance company, but it made sense for them to not pick a financial. [The choice of] a food company makes the index even more representative of the U.S. economy."

A little history on the DJIA: The "industrial" part of the index's name is largely historical. Today, the Dow is made up of 30 large, widely held U.S. companies, and its goal is to provide a representative snapshot of the overall economy. It is a price-weighted index, which means that each stock is represented proportionally to its price per share (so a $100 stock would get twice the weighting of a $50 stock.) If you're interested in how the DJIA differs in weighting and composition from the S&P 500, this Investopedia article is an informative read.

The composition of the Dow was last changed in February 2008, when Bank of America and Chevron replaced former Kraft parent Altria Group and Honeywell International.

The Dow Jones industrial average is tied to a slew of exchange traded funds, including some in the iShares and ProShares lineups, as well among the American Stock Exchange's Diamonds ETFs, IndexUniverse reports.

The shares of Kraft, which has a market cap of more than $50 billion, were up nearly 3 percent mid-day. The stock is currently trading near its 52-week high.