Time to Dig Dow Stocks As 20,000 Approaches
The Dow Jones Industrial Average was one point short of 20,000 on Friday, bringing renewed attention on the storied benchmark index and related exchange traded funds.
The Dow Jones Industrial Average, or simply the Dow, rose to as much as 19,999.63 on Friday or just shy of the widely anticipated 20,000 landmark as a strong jobs report helped further fuel the post-election rally.
The equities rally has been bolstered by hopes of business-friendly policies under a new Donald Trump administration after the President-elect promised to enact $1 trillion in infrastructure spending, corporate tax cuts and potentially repeal regulatory hurdles. Furthermore, many anticipate earnings to return to growth after five consecutive quarters of declines, especially with energy stocks rebounding on rising crude oil prices and the strengthening economic outlook.
With the renewed focus on the Dow, ETF investors have also jumped on the momentum with Dow-related ETFs, such as the SPDR Dow Jones Industrial Average ETF (NYSEArca:DIA), which tracks the Dow Jones Industrial Average, and the Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEArca:DJD), which weighs the 30 Dow stocks by yield.
Potential investors, though, should be aware that the Dow isn't like your normal market capitalization-weighted index, such as the S&P 500. The major difference between the two indices is found in their indexing methodology. The Dow focuses on a price-weighted average of 30 stocks while the S&P 500 is a market capitalization-weighted index of 500 large companies.
The Dow is composed of the 30 largest companies in the U.S. across a number of sectors. Holdings are selected by the editors of the Wall Street Journal. Since the index follows price-weighted methodology, components with higher prices will have a larger impact on the daily movements in the Dow, which has drawn some criticism over its somewhat arbitrary weighting method. Daily changes in the Dow are calculated by adding prices of the 30 Dow stocks and then divided by the “Dow Divisor.”
Currently, DIA's top holdings include Goldman Sachs Group (NYSE:GS) 8.3%, 3M Co. (NYSE:MMM) 6.1%, International Business Machines (NYSE:IBM) 5.8%, UnitedHealth Group (NYSE:UNH) 5.6% and Boeing Company (NYSE:BA) 5.5%. Sector weights include industrials 19.7%, financials 17.9%, information technology 17.0%, consumer discretionary 14.3%, health care 12.8%, Energy 7.1%, consumer staples 6.7%, materials 2.5% and telecom services 1.9%.
In contrast, the S&P 500 is more diversified, with its largest holding Apple (Nasdaq:AAPL) account for a little over 3%. Additionally, The S&P 500 overweights information technology, with more evenly spread out weights in its other sector positions.
Meanwhile, the newer DJD weights positions on dividends, with top holdings including Chevron (NYSE:CVX) 5.7%, Verizon Communications (NYSE:VZ) 5.3%, Caterpillar (NYSE:CAT), 5.0% Boeing (NYSE:BA) 4.8% and International Business Machines (NYSE:IBM) 4.4%. Sector allocations include industrials 18.9%, information technology 18.4%, healthcare 13.4%, consumer staples 11.4%, financials 11.0%, energy 9.5%, consumer discretionary 9.5%, telecom services 5.3% and materials 2.6%.
Due to its weighting methodology, DJD comes with a slightly higher 2.47% 12-month yield, compared to DIA's 2.26% 12-month yield. However, DIA shows a cheaper 0.17% expense ratio, compared to DJD's 0.30% expense ratio, which diminishes the positive effect from the dividend-focused ETF's higher yield.
This article was provided courtesy of our partners at etftrends.com.