3 Stock Picks: CSCO, TRV, DIA

The benchmark Dow Jones Industrial Average got a makeover Monday as networking equipment company Cisco Systems (CSCO) and insurer Travelers (TRV) replaced bankrupt General Motors (GM) and beleaguered Citigroup (C). The move also gave a lift to the Dow Diamonds (DIA) exchange-traded fund.

It's the first change to the benchmark 30-stock index this year. Insurance giant AIG (AIG) was removed last year and was replaced by Kraft Foods (KFT). With General Motors gone after 83 years, only General Electric (GE) remains among the original 12 stocks put on the index in 1896.

"The parlous state of GM has left us with no choice but to remove it from The Dow. A bankruptcy filing immediately disqualifies a stock regardless of a company's history or its role as a cultural icon," said Robert Thomson, The Wall Street Journal's managing editor and editor-in-chief for all of Dow Jones. "We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake." (Thomson oversees the makeup of the Dow index. Dow Jones is owned by News Corporation (NWS), and is a 50% owner of SmartMoney.com with Hearst.)

While the decision to include Travelers wasn’t a controversial one, the Cisco choice was met with some debate. That change is more than symbolic, said Robert Brusca, head of Fact and Opinion Research. By pulling a major manufacturer out and putting in a telecommunications equipment company, the stock index now reflects a different swathe of the economy.

"You've put things into the Dow that aren't very cyclical," he says. "The auto sector is still important, but the world clearly has changed. They could have replaced GM with Ford (F), which would have been a real coup for Ford, but it looks like they didn't want to put them in and maybe have to pull them out in a year. The auto sector is just too troubled."

Zacks Investment Research senior market analyst Charles Rotblut says the index is now skewed too specifically and isn't representing the breadth of the economy as well as it could.

"When you look at what else is in the index I think they really made a mistake," he says. "With Cisco, you already have Hewlett-Packard (HPQ), you already have IBM (IBM), and you have AT&T (T), so there's already exposure to the telecom industry. It might have been better to put Google (GOOG) in there to give the Dow exposure to the Internet."

David Wyss, chief economist at Standard and Poors, which maintains the larger, broader S&P 500 stock index, says that the replacements are reflective of bigger economic changes.

"Travelers for Citi was an easy one, and with Cisco, they did find an actual manufacturer to put in there, as opposed to a service company” he says.

Beyond the cachet of being included in the Dow, both Cisco and Travelers should see some lasting benefit beyond the headlines. The movement of the Dow Diamonds ETF could be less dramatic.

"We don't think a lot of money is tied to the Dow," Wyss says, as opposed to the S&P 500, which is linked to around $6 trillion in various investment products. The Diamonds ETF trades an average of about 3 million shares a day vs. the SPDR S&P Trust fund (SPY) that averages 100 million shares.

That's not to say the changing Dow index lacks relevance.

"It's still the headline in the paper and that counts," says Wyss.