Dow Jones ETF: 2 Ways to Buy the Dow

This article was updated on Feb. 14, 2018, and originally published July 12, 2016.

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.

Data source: State Street Global Advisors, Guggenheim.

Here's what you need to know about these two Dow ETFs, and how the Dow differs from other stock market indexes.

A true Dow Jones ETF with a monthly bonus

The biggest and most popular Dow Jones tracker, the SPDR Dow Jones Industrial Average ETF (DIA 0.60%), 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, making it a very inexpensive fund to buy and hold.

Because the Dow is made up of 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 or annual 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 0.17% annually, due to its 0.17% annual expense ratio.

A modified Dow Jones ETF for higher dividend yields

Looking for higher yields from an ETF that only invests in Dow stocks? The Guggenheim Dow Jones Industrial Average Dividend ETF (DJD 0.68%) offers a different twist on tracking the Dow by weighting its investments by their dividend yields. The result is a fund that offers a yield of 2.58%, which tops the SPDR ETF's 1.96% yield, despite a higher expense ratio.

Because the fund is relatively new, it has a limited performance history. But it's almost certain that its performance will differ meaningfully from the performance of the Dow at any given time. Note that although both ETFs own the same 30 stocks, their top five holdings differ entirely. The differences in weighting can create a very different outcome for investors.

Data source: SPDR and Guggenheim Investments.

The yield of the dividend-focused Dow ETF would be higher if not for its expenses, which tally to 0.30% of assets annually, making it nearly twice as expensive as the SPDR Dow Jones Industrial Average ETF. Fortunately, every Dow component currently pays a dividend, so the fund doesn't sacrifice any Dow stocks in the pursuit of higher dividend yields, though it invests comparatively less in stocks that offer a lower yield.

That said, different investment objectives can result in some biases toward specific sectors. For example, the yield-focused Dow ETF has less invested in financial stocks (11.5% of assets) than the simple Dow tracker (20% of assets) due to the fact financial stock prices have increased faster than their dividend yields in recent months.

S&P 500 ETFs are almost universally more diversified and less expensive than a Dow Jones ETF. Image source: Getty Images.

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.

The Average's weighting mechanism creates some odd outcomes. For example, a stock split has an effect on a company's weighting in the Dow, even though it has no impact on a company's market value or its return for investors. Modern indexes like the S&P 500 index and the Total Stock Market Index are weighted by a company's market capitalization rather than share price.

Similarly, because the DJIA is controlled by committee, it lacks clear and specific rules for why stocks are added and removed. S&P Dow Jones Indices notes on its website that "while stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration."

Data source: Morningstar, as of market close on Oct. 5, 2017.

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, the index is not a broadly diversified one like the S&P 500 or Total Stock Market Index.

That said, the S&P 500 and Dow are very strongly correlated, with both rising or falling in value on any given day, though not always to the same degree. The Dow ETF and a popular S&P 500 fund have negligible differences in total returns over most periods, driven by the fact that the Dow is more concentrated than the S&P 500. Boeing, for example, currently makes up about 9.6% of the Dow's price moves, whereas the S&P 500's largest component, Apple, makes up approximately 3.6% of its price moves. 

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