The Basics of Tracking the Dow with ETFs

Worldwide Invest Better Day 9/25/2012

The Motley Fool has helped ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

Along those lines, I'm planning to take a look at many of the most popular exchange-traded funds in the market today. ETFs have skyrocketed in popularity, but it's important to understand exactly what you're getting when you buy an ETF. Today, I'd like to focus on the SPDR Dow Jones Industrial Average ETF (NYSE: DIA  ) , also known colloquially as the Dow Diamonds.

Why buy Dow Diamonds?
The Dow Diamonds ETF is an old-timer in the ETF world, having started trading at the beginning of 1998. Its purpose is simple: It tracks the Dow Jones Industrial Average (INDEX: ^DJI  ) , the premier blue-chip index of U.S. stocks. Although there's no hard-and-fast rule, each share of the Dow Diamonds corresponds to about 1% of the current value of the Dow.

Inside the ETF, you'll find shares of all 30 Dow stocks, all with the exact same number of shares of stock. That's because unlike many benchmarks, the Dow is price-weighted. Price weighting presents challenges in some cases, but it has the benefit of making ETF-tracking easy. Investors have plowed about $21 billion into the ETF.

One nice benefit of owning Dow Diamonds is that the ETF pays a healthy dividend yield. Right now, the ETF's yield is about 2.4%, thanks in large part to outsized contributions from some of the heftier dividend-payers in the Dow. For instance, Dow telecom stocks AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) have to spend a lot of money on improving their networks, but between landlines and other monthly customer income, the businesses are cash cows. High levels of cash flow support dividends in the 4% to 5% range, even as the two stocks have risen to multiyear highs recently. All in all, at current prices, you can expect to get about $240 in dividends every year for every $10,000 you invest in the Dow Diamonds.

The Dow Diamonds are also relatively inexpensive to own. Annual expenses of $18 for every $10,000 you invest aren't the absolute lowest in the business, but they're fairly attractive compared to the overall universe of ETFs.

Learn more
If you like the Dow, the Dow Diamonds ETF gives you an easy way to own all 30 Dow stocks in a single investment. To learn more about the Dow Diamonds, use this link to the ETF's main information page, and be sure to follow the Fool's daily coverage on the Dow using our My Watchlist feature.

Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Worldwide Invest Better Day 9/25/2012

Fool contributor Dan Caplinger knows Diamonds can be anyone's best friend. He doesn't own shares of Dow Diamonds or the other companies mentioned in this article, although he does own certain component stocks in the Dow. 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 Fool's disclosure policy likes giving you the basics.


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  • Report this Comment On September 10, 2012, at 2:26 PM, fool3090 wrote:

    To offer a contrary view, I would not own DIA simply for the fact that it's not a diversified investment at all. If you're going to own a broad index, the S&P 500 is a much better place to be. The risk is spread out over 500 firms and not the mere 30 of the Dow. It's a cheaper ETF, too, if you get it from Vanguard (VOO), whose expense ratio of 0.05, which is more that three times less than DIA's. The current yield is around 2.19 percent -- not as high, but good enough. My 2 cents.

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