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Another Dow ETF Comes To Town

August 10, 2017 8:46 am
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For all the criticism surrounding its methodology and small roster, the Dow Jones Industrial Average remains a widely followed U.S. equity index. Among exchange traded funds tracking the Dow, the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) is the dominant name.

However, DIA's ETF dominance of the Dow has not deterred some competitors from coming to market. The newest entrant to the Dow ETF fray debuted Wednesday in the form of the First Trust Dow 30 Equal Weight ETF (NYSE:EDOW).

“The Dow 30 Equal Weight ETF tries to reflect the performance of the Dow Jones Industrial Average Equal Weight Index, which will equally weight a portfolio of 30 securities that comprise the benchmark Dow Jones Industrial Average, or the Dow,” reports ETF Trends. “The equal-weight indexing methodology would allow each company stock to equally contribute regardless of their price, which many believe could significantly diminish stock specific risk relative to price weighting.”

A Different Way Of Doing Business

The main source of the criticism surrounding the Dow stems from its price-weighted methodology. That means the stock with the highest price tag, currently Boeing Co. (NYSE:BA), is the Dow's and DIA's largest holding and so on.

Obviously, EDOW takes a different approach. While Boeing, Goldman Sachs Group Inc. (NYSE:GS) and 3M Co. (NYSE:MMM) combine for about 21 percent of the traditional Dow's weight, those stocks combine for 10 percent of EDOW.

“The Dow Jones Industrial Average has been an important barometer for blue-chip US stocks,” Ryan Issakainen, CFA, senior vice president, ETF strategist at First Trust, said in a statement. “We believe that the equally weighted version of this index is a noteworthy enhancement for ETF investors, in comparison to the traditional price-weighted version of the index.”

Pricier Than DIA

EDOW charges 0.5 percent per year, or $50 on a $10,000 investment. That is nearly triple the annual fee on DIA, but equal-weight ETFs are typically more expensive than cap-weighted counterparts.

The other Dow ETF on the market is the Guggenheim Dow Jones Industrial Average Dividend ETF (NYSE:DJD), which weights the 30 Dow stocks based on dividend yield.

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