The Dow Jones Industrial Average is one of the most widely followed stock indexes in the world, seen as a barometer of U.S. equity market performance. The rise of the ETF industry has given investors the option to track the performance of this benchmark, and a number of spin-offs have increased ETF options for investing in the Dow. But before buying into one of the available Dow ETFs, investors should be aware of the potential drawbacks and limitations associated with each of the funds [see also Free Report: How To Pick The Right ETF Every Time].
History of the Dow
The Dow is the market index created by Wall Street Journal founder, and Dow Jones & Company co-founder, Charles Dow, who named the benchmark after himself and statistician Edward Jones. The benchmark is the second oldest in the U.S., behind only the Dow Jones Transportation Index. The composition of the index has changed gradually over the years, with the current version having limited exposure to the industrial sector that once dominated (accounting for the use of “industrial” in the name). Exxon Mobil (XOM) has been included in the DJIA since 1928 (originally as Standard Oil), while other components were added as recently as 2015 [sign up for the ETFdb newsletter to get updates and analysis].
The Dow’s popularity in the investing community is perhaps more attributable to the long history and visibility of the index rather than its efficiency as an equity market benchmark. The Dow is a price-weighted benchmark, meaning that higher-priced stocks are given more weight than lower-priced counterparts. Moreover, because the index includes only 30 component stocks, it doesn’t always provide a good representation of overall market performance. By comparison, the S&P 500 Index is a float-adjusted market cap-weighted benchmark with a much broader base of holdings [see also The Truth About Alternative Weighting Methodologies].
Despite the potential drawbacks of investing in the Dow highlighted above, there are a few ETFs based on the DJIA that have become popular with investors:
|(DIA )||State Street Dow Jones Industrial Average||0.17%|
|(DOD )||ELEMENTS DJ High Yield Select 10 ETN||0.75%|
Inverse and Leveraged Dow ETF Options
For investors looking to gain inverse or leveraged exposure to the Dow Jones Industrial Average, ProShares offers a handful of ETF options:
|DOG||ProShares Short Dow30||0.95%|
|DDM||ProShares Ultra Dow30||0.95%|
|DXD||ProShares UltraShort Dow30||0.95%|
- ProShares Short Dow30 (DOG ): This ETF seeks daily investment results that correspond to the inverse of the daily performance of the DJIA.
- ProShares Ultra Dow30 (DDM ): This ETF seeks daily investment results that correspond to 200% of the daily performance of the DJIA.
- ProShares UltraShort Dow30 (DXD ): This ETF seeks daily investment results that correspond to 200% of the inverse of the daily performance of the Dow.
Under The Hood: Dow ETFs
State Street Dow Jones Industrial Average ETF (DIA )
This ETF seeks to provide investment results that correspond to the price and yield performance of the Dow Jones Industrial Average. It’s one of the largest and most widely traded U.S. ETFs, boasting over $12 billion in assets under management with average daily trading volumes topping 5 million shares. It’s also one of the largest ETFs by market cap and is among the most liquid ETFs.
DIA’s holdings match the underlying index almost exactly, meaning it comprises 30 mega-cap companies with a median market cap exceeding $100 million. The difference between DIA’s market value and the return on the DJIA has approximated the fund’s expense ratio since its inception more than 15 years ago, indicating that DIA is generally efficient in minimizing tracking error. From a cost perspective, DIA is fairly competitive, charging an expense ratio of just 0.17% for Large Cap Value Equities exposure.
ELEMENTS DJ High Yield Select 10 ETN (DOD )
This exchange-traded note is linked to the Dow Jones High Yield Select 10 Total Return Index, a benchmark that offers investors exposure to the highest yielding components in the DJIA. Every December, the thirty stocks in the Dow Jones Industrial Average are ranked by indicated annual dividend yield. The ten stocks with the highest indicated annual dividend yield are selected as index components [see Monthly Dividend ETFdb Portfolio].
The “Dogs of the Dow” investment strategy was introduced in the early 1990s by money manager Michael B. O’Higgins in the book Beating the Dow. Given this targeted approach in selecting the highest yielding companies, it’s easy to see how this ETN could appeal to investors looking to maximize current income [see Dividend ETF Investing: Four Critical Factors To Consider].
Fees are a major drawback of pursuing this investment strategy through an ETN. DOD charges a fairly steep expense ratio of 0.75% for implementing a strategy that is relatively easy for most investors to execute on their own at a much cheaper rate. It should also be noted that DOD is structured as an exchange-traded note, meaning that it exposes investors to the credit risk of the issuing institution.
For more ETF analysis, make sure to sign up for our free ETF newsletter.