Dow Jones Industrial Average ETFs

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Contributor, Benzinga
April 5, 2023

The benchmark index for many investors these days might be the S&P 500 index, but it is by no means the oldest. That honor goes to the long-standing Dow Jones Industrial Average, which debuted 138 years ago in 1885 as a way to track some of the largest publicly traded industrial companies in the U.S. market. 

While the Dow has been superseded by the S&P 500 and the Nasdaq 100 indexes, it's still tracked today by those who favor a more concentrated view of the U.S. economy. Because of its unique composition, the Dow has historically performed differently than the S&P 500 and Nasdaq 100.

To invest in the Dow, investors can make use of numerous exchange-traded funds (ETFs) that track its performance. While these ETFs aren't as popular as S&P 500 or Nasdaq 100 ETFs, they are still traded by investors seeking alternative sources of large-cap, blue-chip U.S. stock exposure.

Here’s all you need to know before investing in a Dow Jones Industrial Average ETF. 

What are Dow Jones Industrial Average ETFs?

The Dow Jones Industrial Average is an index of 30 large-cap, blue-chip U.S. companies, representing most sectors and industries except transportation and utilities. Unlike the S&P 500 or Nasdaq 100, the Dow is price-weighted – each of its stocks is assigned a proportion based on its current share price, not its market cap. Therefore, stocks with a high price per share are given a higher weight in the Dow.

Investors who wish to invest in the Dow Jones Industrial Average can consider using Dow Jones ETFs, which hold a portfolio of stocks selected to mimic the current holdings of the underlying index. These ETFs have their own tickers and are traded on stock exchanges, making it easy for investors to buy and sell shares like they would for normal stocks. 

It's important to note that while a Dow Jones ETF aims to replicate the performance of the index, there may be slight discrepancies over time from factors such as portfolio turnover, expenses, taxes and transaction costs. These factors cause tracking error, which is the difference between the ETF's returns compared to the index's actual returns. Therefore, investors should prioritize ETFs with low expenses and portfolio turnover to minimize tracking error.

When screening Dow Jones ETFs, investors should also consider factors such as sufficient liquidity, strong daily trading volume and high assets under management. These factors make it easier for investors to enter or exit positions and ensure that bid-ask spreads are not excessively wide. While ETFs are fairly liquid, the lower popularity of Dow ETFs makes this factor all the more important to watch out for. 

Types of Dow Jones Industrial Average ETFs

Dow Jones Industrial Average ETFs tend to be less popular among U.S. investors with fewer products traded on the market. Still, for those looking to index the Dow, the following types of ETFs are available:

  1. Index: ETFs of this type hold all the stocks in the Dow Jones Industrial Average index with its standard price-weighted methodology. These ETFs are designed to mimic the performance of the Dow Jones Industrial Average index as closely as possible. The SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA) is currently the most notable example of this type. These ETFs typically have lower fees, higher liquidity, and minimal portfolio turnover.
  2. Leveraged: Leveraged Dow Jones Industrial Average ETFs offer enhanced exposure to the returns of the Dow Jones Industrial Average index. For instance, the ProShares Ultra Dow30 (NYSEARCA: DDM) seeks to provide a daily return 2x that of the Dow Jones Industrial Average index. If the Dow goes up by 2% in a day, DDM will go up by 4%, and vice-versa if the Dow falls. Leveraged ETFs are intended for short-term trading purposes and are not recommended for long-term holds due to their high volatility and fees.
  3. Inverse: Inverse Dow Jones Industrial Average ETFs aim to deliver returns opposite that of the Dow Jones Industrial Average index. For example, the ProShares Short Dow30 (NYSEARCA: DOG) targets a daily return of -1x the Dow Jones Industrial Average index. If the Dow goes down, DOG will go up, and vice versa. Inverse ETFs are mostly used by traders who want to bet against the performance of the Dow Jones Industrial Average index or hedge a long stock position.
  4. Covered call: These ETFs hold the 30 stocks in the Dow Jones Industrial Average index and sell call options to generate greater yields. By doing so, covered call ETFs convert their total return potential into higher-than-average current income. The Global X Dow Jones Covered Call ETF (NYSEARCA: DJCI) is a popular example of a covered call Dow Jones Industrial Average ETF.
  5. Dividend: These ETFs do away with the price-weighted methodology of the Dow Jones Industrial Average index to implement different rules for selecting and weighting the individual Dow stocks. For example, the Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA: DJD) weights its holdings based on trailing 12-month dividend yields, with the highest-yielding Dow stocks receiving greater allocations. 

Benefits of Dow Jones Industrial Average ETFs

ETFs tracking the Dow Jones Industrial Average may be good investments for investors seeking exposure to dividend-paying blue-chip stocks. Benefits include:

  • Higher yields: Thanks to its blue-chip nature, the Dow Jones Industrial Average index tends to hold a higher concentration of mature, dividend-paying stocks than the S&P 500, which can be good for those seeking higher yields. 
  • Reasonable fees: Dow Jones Industrial Average ETFs charge lower expense ratios, around 0.20% in DIA's case, translating to an annual cost of around $20 for a $10,000 investment, which is less than actively managed mutual funds. DJD is even cheaper, with an expense ratio of 0.07%. 
  • Strong historical performance: Like most U.S. equity indexes, the Dow Jones Industrial Average has historically provided a good average return on par with the S&P 500 index. 

Drawbacks of Dow Jones Industrial Average ETFs

The Dow Jones Industrial Average has numerous features that some investors may not like. These drawbacks include:

  • Price-weighted: The stocks in the Dow Jones Industrial Average are weighted based on their share price, not market cap. Some investors may find this irrational and arbitrary. 
  • Concentration: The Dow Jones Industrial Average only holds 30 stocks, much less than the S&P 500 and Nasdaq 100. This number may not offer sufficient diversification for some investors. 
  • Lack of diversification: To that end, the Dow Jones Industrial Average also only tracks large-cap U.S. stocks. ETFs tracking it will lack small-cap stock and international stock exposure.

Compare Dow Jones Industrial Average ETF Brokers

Investors looking to research and choose the best Dow Jones Industrial Average ETFs can use Benzinga to compare the available selections available on the market. This ETF type tends to be less popular, so it's important to sort through the available options carefully. Here is a list of brokers that support Dow Jones Industrial Average ETF trading and offer research tools to help investors select the right one.

Frequently Asked Questions

Q

Are Dow Jones Industrial Average ETFs a good idea?

A

A concentrated, price-weighted investment like a Dow Jones Industrial Average ETF is best suited for investors bullish on U.S. large-cap, blue-chip performance who don’t mind their portfolio being concentrated in just 30 stocks. For those seeking greater diversification, a Dow Jones Industrial Average ETF might not be the best idea. A broader index ETF tracking the S&P 500, or the total U.S. market could be a good alternative. In addition, it might be a good idea to also diversify with international stocks, small-cap stocks, and high-quality bonds.

Q

Are Dow Jones Industrial Average ETFs a safe investment?

A

A “safe” investment is one that is unlikely to lose value when markets drop or in response to economic changes such as rising interest rates or inflation. This would generally entail short-term Treasury bonds or money market funds. An investment like a Dow Jones Industrial Average ETF is not safe in the least because it holds 100% of its portfolio in stocks, just 30 in fact. Dow Jones Industrial Average ETFs are not only subject to risks from the broad market crashing but also geographic-specific risks from the U.S. economy stagnating. Investors who choose all-equity investments like a Dow Jones Industrial Average ETF must be prepared to withstand high volatility and unrealized losses. 

About Tony Dong

Tony Dong, MSc, CETF®, is a seasoned investment writer and financial analyst with a wealth of expertise in ETF and mutual fund analysis. With a background in risk management, Tony graduated from Columbia University in 2023, showcasing his commitment to continuous learning and professional development. His insightful contributions have been featured in reputable publications such as U.S. News & World Report, USA Today, Benzinga, The Motley Fool, and TheStreet. Tony’s dedication to providing valuable insights into the world of investing has earned him recognition as a trusted source in the finance industry. Through his writing, he aims to empower investors with the knowledge and tools needed to make informed financial decisions.