The Dow Jones Industrial Average
Up 6% in 2012, the index has been on a hot streak to start the year -- even hitting a four-year high yesterday.
Today, I thought I would survey the ways a retail investor can invest in the Dow index ... without actually having to buy shares of all 30 stocks. Spoiler alert: Many of these are suitable for speculators rather than investors.
SPDR Dow Jones Industrial Average
This exchange-traded fund (ETF) is the most popular Dow-tracking investment, with more than $11 billion in assets and 6 million shares traded every day. It owns the 30 stocks in roughly equal weight to the index.
It's popular for a good reason: It tracks the index at a very low cost (the ETF's expense ratio is just 0.19%).
ProShares Dow30
ProShares offers a series of ETFs geared toward traders, not long-term investors. For those very bullish on the Dow's future, the DDM offering aims to achieve daily investment results that "correspond to twice (200%) the daily performance of the Dow Jones Industrial Average" before fees and expenses. The key word here is daily -- these leveraged ETFs reset every single day. (Read "The Hidden Cost of Leveraged ETFs" for more on this type of investment.)
Not resting there, the there's also ProShares UltraPro Dow30 (UDOW), which seeks three times (!) the daily return of the Dow. Both the Dow30 and UltraPro Dow 30 ETFs have expense ratios of 0.95%.
ProShares Short Dow30
ProShares Short Dow30 is the inverse -- this one is a leveraged bet ("-1x") that the Dow will drop. It, too, resets daily, and ProShares is careful to qualify what that means: "Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period."
ProShares also offers the Ultra Short Dow30
All of these bearish leveraged ETFs have an expense ratio of 0.95%.
Dow 30 Premium & Dividend Income (DPD)
This closed-end fund has articulated a strategy of providing a "high level of current income," with capital appreciation a "secondary objective." To do that, it invests in the Dow components in similar weightings to the actual index, and then it writes covered calls to generate additional income. (See "Why Closed-End Funds Scare Investors" for more.)
The DPD closed-end fund, which sports an expense ratio of 1.02%, has a "managed distribution policy" to make it appealing to income seekers. It also trades at a discount to its net asset value.
Dow 30 Premium Enhanced (DPO)
Nuveen Asset Management also offers this closed-end fund. Rather than summarize it, I'll just let the fund company explain what a Dow "Premium Enhanced" investment vehicle is:
The Fund will also purchase other securities or financial instruments, primarily swap contracts, designed to provide additional investment exposure (i.e., leverage) to the return of the Dow Stocks ("Additional Dow Exposure"). The Dow Stocks and the Additional Dow Exposure collectively are referred to herein as the "Total Dow Exposure." The Fund also will engage in certain option strategies, primarily consisting of writing (selling) covered call options on some or all of the Dow Stocks ("Options").
This fund charges 1.01% in expenses.
ELEMENTS Dogs of the Dow ETN (DOD)
As an exchange-traded note (ETN), this is the only debt security in the mix. (For more information about ETNs, see "What's an ETN?") The ELEMENTS Dogs of the Dow ETN is up for maturity on Nov. 14, 2022.
This investment mimics the Dogs of the Dow strategy -- it buys the 10 stocks in the Dow Jones Industrial Average that have the highest dividend yield. Every year, it rebalances itself to adjust for new weightings and entrants to the 10 Dow Dogs. It does this for an annual fee of 0.75% -- which some have pointed out as dubious.
The landscape
Full disclosure: I don't think the Dow is even the best index for investors to track -- for its price-weighting, among other reasons -- but the best choice in this bunch is the plain-vanilla SPDRs ETF.
I'm not excited by the thought of leveraged ETFs, closed-end funds that dabble in options to bolster income for its fundholders, or a 10-stock ETN that could easily be replicated. Most of the investment vehicles mentioned are focused on the short term, but the Dow components are mature, established, blue-chip companies that are best suited for longer time horizons.
For investors interested in the long term, there's one Dow component that Fool.com's consumer-goods expert believes is set to dominate emerging markets over the next decade and more. It's detailed in a new free report, which you can access for free by clicking here.
