Does Goldman Sachs Group Inc (GS) Deserve to Be in the Dow Jones Industrial Average (^DJI)?

By itself, Goldman will resolve that issue by replacing Bank of America Corp (NYSE:BAC): The price-weighted Dow gives Goldman about 11 times the weight that Bank of America Corp (NYSE:BAC) had. Combine that with the addition of credit card giant Visa, and financials will now reverse their prior deficiency and have more influence on the Dow than they arguably deserve.

Some will argue that with just half of Bank of America Corp (NYSE:BAC)’s market capitalization, Goldman isn’t large enough to deserve a place in the Dow. From a diversification standpoint, though, Goldman complements JPMorgan Chase reasonably well, as Goldman adds a larger component of underwriting and financial trading to go with JPMorgan’s retail banking and credit card exposure. Among traditional investment banks, Goldman is bigger than Morgan Stanley and also avoids the issue of reuniting the two former halves of banker J. P. Morgan’s empire in the collective investor consciousness.

Will Goldman earn its place in the Dow?
Looking forward, Dow investors will want to know whether the company will perform well enough to justify its elevation to the average. On that score, Goldman faces some challenges. On one hand, regulation requiring the investment bank to reduce its leverage has diminished Goldman’s ability to take outsized risks in an effort to generate huge returns. That could limit the bank’s profit-growth potential going forward, especially if it decides to retain the bank charter it got in 2008.

In its favor, though, Goldman isn’t alone in dealing with the difficulties of a post-crisis world. Given the bank’s healthier balance sheet, the risk of a complete implosion within Goldman is far smaller than it was before the financial crisis. As investors get more comfortable with Goldman’s ability to maintain competitive advantages in a new financial-industry environment, the stock should at least have the potential to outperform its rivals. That in itself could be enough to justify the Dow’s decision in many people’s eyes — even if they never come around to thinking that Goldman deserved its Dow spot.

The article Does Goldman Deserve to Be in the Dow? originally appeared on Fool.com is written by Dan Caplinger.

Fool contributor Dan Caplinger owns warrants on Bank of America and JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America and JPMorgan Chase.

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