Is it time to overhaul the Dow index?

By Deepa Seetharaman

NEW YORK (Reuters) - There was a time when a tumble below $10 in the share price of a company in the Dow Jones industrial average meant ignominy.

Now, after vertiginous stock market falls in recent months, five of the venerable index's 30 components are trading under that price, including its two oldest members, conglomerate General Electric and automaker General Motors.

Citigroup stock plunged below $2 on Friday, making it cheaper than a medium cup of coffee at Starbucks.

Continued membership in the Dow of these battered stocks, which include aluminum producer Alcoa and Bank of America, is raising questions over whether the index should overhaul its lineup to include the likes of bank Goldman Sachs or Internet company Google.

It has also stoked a decades-old debate over whether the 112-year-old index is really an accurate snapshot of the overall U.S. economy.

"It's been out of touch for a while," said Jocelynn Drake, an equities analyst at Schaeffer's Investment Research.

"There are companies out there that are more significant to the market and they have not appeared in the Dow and there are others that should have been kicked out."

But expelling stocks because they are cheap would fail "to tell the story of the U.S. economy," said John Prestbo, editor and executive director of the Dow Jones Indexes.

"Companies that have sunk so far down we've kept because they were still telling the story of the financial industry," said Prestbo, who helps select the companies in the Dow.

He declined to comment on the possibility of an index makeover but did not rule out the idea.

ELITE GROUP FACES CHANGE

Financial journalist Charles Dow created the index in 1896 to help investors track market trends in the absence of other metrics. Most investors, however, now use broader indexes such as the S&P 500 to follow stocks.

Still, the Dow is the most widely watched measure of the U.S. stock market and its members are considered an elite fraternity representing the best names in corporate America.

The index is rarely altered but when it is, it is done so at the discretion of a team of editors at The Wall Street Journal. Changes in its makeup affect funds such as Diamonds Trust, an exchange traded fund that mirrors the Dow.

It was last changed in September when food company Kraft Foods replaced American International Group after the U.S. government took a large stake in the insurer.