Despite the bailout, it’s time to remove AIG from the Dow. Here’s the short-list of which company might replace it.

There are a couple of ways to approach that question.

The ten largest companies by market-cap that are not in the Dow are:

Cisco: $43 billion
Apple: $39 billion
Pepsico: $37 billion
Wells Fargo: $37 billion
Philip Morris: $36 billion
Google: $34 billion
ConocoPhillips: $33 billion
Abbott Labs: $29 billion
Qualcomm: $25 billion
Oracle: $24 billion

There are a few other smaller companies I might put on the “short list” because they represent areas of the economy where the DJIA has little coverage:

Amgen (biotech): $23 billion
Monsanto (agriculture): $20 billion
UPS (transportation): $15 billion

That gives us 13 candidates. Off the top, we can eliminate Pepsico (too similar to Dow component Coca-Cola) and Philip Morris (too toxic, even for a company controlled by Rupert Murdoch). That leaves us with eleven.

Where will Dow go? 

It’s impossible to say for sure. Unlike other indexes, the components of the DJIA are picked on a highly discretionary basis.  We can, however, look at the current components of the Dow to see where the index is over- and under-concentrated.

The following table compares the sector weights of the Dow with the sector weights of the S&P 500.

Obviously, Industrials are the big difference – the Dow Jones Industrial Average is overweight Industrials.  Big surprise.

Beyond that, the two biggest areas of focus are Finanicals (where the Dow is underweight 5.72%) and Healthcare ( where it is underweight 4.19%).  The Financials discrepancy will widen with the removal of AIG.

With that in mind, I’m going to bet on Wells-Fargo and (darkhorse pick) Amgen as the two leading candidates. Apple and Cisco are possibilities too.

Of course, Dow might decide to reshuffle more than just AIG. It often makes multiple changes at once. I’d put General Motors on the watch list for exiting the index as well.

Actually, before I get to that, I can’t leave Jim Wiandt’s comments alone. (If you want to skip the internecine fighting and get to the meat of my post, jump five paragraphs ahead.)

  —About Jim’s Blog—

On an unrelated note … In today’s blog, Jim taunts me for writing yesterday about tax-loss harvesting. He calls my article “lamo.” I’m think that’s the European spelling for “lame-o.”

Anyway, beyond the fact that tax-loss harvesting is one of the smartest things investors can do in a downturn, what is incredible to me about Jim’s post is that, after calling my post “lamo” [sic], he proceeds to write 3,400 words on whether market capitalization is the appropriate means of creating sector indexes.

“Its times like now when BIGTIME shifts are going on that small and large and growth and value fade into the background like Latin classes or Cartesian rationalism,” he writes.

Cartesian rationalism? Latin classes? Talk about fiddling while Rome burns.

As a rule, Jim, let’s try to keep the blogs shorter than Underworld and more readable than Finnegan’s Wake.

Last 5 posts by Matt Hougan

• Long-Term Treasury Shorts? - July 16th, 2009
• Home Prices In 2014? Dead Flat From Here - June 30th, 2009
• Papering Over The Problem - June 16th, 2009
• What's Wrong With ETFs - June 15th, 2009
• A (Popular) ETF Down 97%??? - June 4th, 2009