Dow Jones ETF: 2 Ways to Buy the Dow

By Markets Fool.com

Image source: Getty Images.

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Built to track 30 blue chip stocks, the Dow Jones Industrial Average is often referenced as a barometer for the performance of the stock market in newspapers and on cable news. These two Dow Jones ETFs track the performance of the Dow and carry low expense ratios, making them suitable for buy-and-hold investors.

SPDR Dow Jones Industrial Average ETF

The biggest and most popular Dow Jones tracker, the SPDR Dow Jones Industrial Average ETF, has done an excellent job tracking the performance of the Dow since it was launched in 1998. The fund also carries a low annual expense ratio of just 0.17% of assets, ensuring that it is inexpensive to buy and hold.

Because the Dow is generally made up of investments in 30 mature companies, its components typically pay larger dividends than the average stock. Conveniently, this ETF distributes dividends to its investors monthly, in contrast to many funds which generally distribute dividends on a quarterly basis.

Despite some inherent difficulties in tracking an average, the fund has historically delivered on its promise to track the Dow. Over the most recent 10-year period, the fund deviated from the performance of the Dow by only 0.18% annually, largely driven by its 0.17% annual expense ratio.

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Guggenheim Dow Jones Industrial Average Dividend ETF

Looking for higher yields? TheGuggenheim Dow Jones Industrial Average Dividend ETF offers a different twist on tracking the Dow by weighting its investments by their dividend yields. The result is a fund that should reward investors with bigger dividend distributions than traditional Dow Jones trackers. The fund's yield of 2.81% easily tops the SPDR ETF's 2.42% yield.

Because the fund is relatively new, it has a limited performance history. However, based on the differences between its portfolio and that of true Dow Jones ETFs, it's almost certain that its performance will differ meaningfully from the performance of the Dow at any given time.

Top 5 Holdings for DIA

Top 5 Holdings for DJD

3M Company

Chevron

IBM

Verizon

Goldman Sachs

Pfizer

United Healthcare Group

Caterpillar

Home Depot

IBM

Data source: SPDR and Guggenheim Investments.

The ETF's yield would be higher if not for a costlier expense ratio of 0.30% of assets annually, making it nearly twice as expense as the SPDR Dow Jones Industrial Average ETF. Fortunately, every Dow component currently pays a dividend, so this fund doesn't sacrifice any Dow stocks in the pursuit of higher dividend yields.

Should you buy the DJIA?

The Dow Jones Industrial Average is a relatively old creation, first calculated in 1896. It is a price-weighted average, meaning that its performance is most heavily affected by the companies with the highest per-share stock prices. Therefore, a stock split has an effect on a company's weighting in the Dow, even though it has no impact to a company's market value. Modern indexes like the S&P 500 Index and the Total Stock Market Index are weighted by a company's market capitalization.

Similarly, because the DJIA is controlled by committee, it lacks clear rules for which stocks are added and removed. S&P Dow Jones Indices notes on its website: "While there are no rules for component selection, a stock typically is added only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by the average."

Annualized Returns by Fund and Period

SPDR Dow Jones Industrial Average ETF

Vanguard 500 Index Admiral Shares

5 years

9.85%

11.67%

10 years

7.43%

7.36%

15 years

6.05%

5.73%

Data source: Morningstar.

Alas, a company's reputation and interest among a large number of investors says nothing about its ability to generate excellent returns for investors. Furthermore, because it includes only 30 stocks, it is not a broadly diversified index like the S&P 500 or Total Stock Market Index.

The Dow Jones Industrial Average has performed roughly in line with other large-cap stock index ETFs, narrowly beating out a popular S&P 500 fund over 10- and 15-year periods but lagging in the most recent five-year period.

Investors who aren't afraid of the Dow's limited diversification may prefer to hold it for its higher yieldingcomponents, though a more diversified ETF may be a better choice for hands-off investors.

The article Dow Jones ETF: 2 Ways to Buy the Dow originally appeared on Fool.com.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Chevron, Home Depot, and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.