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A Better Way To The Dow With This ETF

February 26, 2016 8:15 am
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There are two frequent criticisms of the still venerable Dow Jones Industrial Average. First, naysayers highlight the fact that the 30 stocks is just too small a representation of the U.S. equity market. Second, the Dow's price-weighting methodology is antiquated.


As the term implies, price-weighting methodology means the Dow's largest holding is the index constituent with the largest price tag. These days, that is 3M Co. (NYSE: MMM). 3M has a weight in the Dow that is more than 250 basis points above that of Apple Inc. (NASDAQ: AAPL) despite that fact that Apple has a market value more than five times larger than that of 3M.


Perhaps the newly minted Guggenheim Dow Jones Industrial Average Dividend ETF (NYSE: DJD) is a better Dow mousetrap. DJD, which debuted in December, seizes on one of the Dow's biggest advantages, that being all 30 members pay dividends, by weighting the Dow's 30 stocks by trailing 12-month dividend yield. The new ETF tracks the Dow Jones Industrial Average Yield Weighted Index.


Barely more than two months of operating history is a small sample set, but since it came to market, DJD's loss is just half as bad as the Dow itself.


Weighting by yield makes a significant difference in terms of the percentages assigned to DJD's holdings. For example, 3M's weight in the Guggenheim ETF is about 300 basis points below what it is in the Dow. Goldman Sachs Group Inc. (NYSE: GS) is the Dow's second-largest holding at just over six percent, but the investment bank is DJD's second-smallest holding at a weight of just 1.2 percent.


Owing to tumbling oil prices, which have sent its trailing 12-month yield to 4.82 percent, Chevron Corp. (NYSE: CVX) is DJD's largest holding with a weight of 6.5 percent. Verizon Communications Inc. (NYSE: VZ) is the only other member of DJD's lineup to command more than five percent of the ETF's weight.


Another significant difference between DJD and the traditional Dow, not surprisingly, is yield. As in DJD's 30-day SEC, relevant here because of the ETF's youth, is about 60 basis points higher than the standard Dow's trailing 12-month yied.

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