Here's an opinion: It's time to forget about the Dow Jones Industrial Average (DJINDICES: ^DJI).
Now, I don't mean it's time to eliminate the Dow. That would be going too far. I just mean it's time for investors to focus on other indexes, particularly when it comes to where they're going to invest their hard-earned money.
Because while the Dow Jones Industrial Average has a storied history dating back more than 130 years, it hasn't been keeping up with the other major indexes of late. Indeed, of the three main benchmark indexes -- the S&P 500, the Nasdaq Composite, and the Dow -- the Dow has by far the lowest rate of return since the end of the financial crisis.
What's more, in the era of plentiful exchange-traded funds (ETFs), investors have more choices than ever before.
One such ETF, the Vanguard Information Technology Index Fund (VGT 1.72%), is in my view a superior alternative to the Dow.
Image source: Getty Images.
What is the Vanguard Information Technology Index Fund?
The Vanguard Information Technology Index Fund focuses (as you'd expect from the name) on the information technology sector. It tracks the MSCI US Investable Market Information Technology 25/50 Index, a benchmark that comprises large-cap, mid-cap, and small-cap U.S. tech stocks.
Top holdings include tech megacaps like Microsoft, Apple, and Nvidia.
| Company Name | Symbol | Percentage of Assets |
|---|---|---|
| Microsoft | MSFT | 20.5% |
| Apple | AAPL | 20.2% |
| Nvidia | NVDA | 5.1% |
| Broadcom | AVGO | 4% |
| Adobe | ADBE | 2.2% |
Since most tech stocks pay either low-yielding dividends or no dividends at all, the ETF has a tiny yield of 0.6%. However, the fund also boasts a minimal expense ratio of 0.1% -- meaning investors will only pay $10 in annual fees for every $10,000 they have invested in the fund.
Why is the Vanguard Information Technology Index Fund a superior alternative to the Dow?
In short, it's a better choice for investors because of its holdings.
First, it gives outsized weights to Microsoft and Apple, each of which accounts for about 20% of the fund's holdings. Compare that to the Dow, where Microsoft accounts for only about 7% of the index, and Apple accounts for less than 3%.
Next, the Vanguard fund has numerous semiconductor companies, including Nvidia (5% of fund holdings), Broadcom (4%), and Advanced Micro Devices (2%). The Dow, meantime, has only one semiconductor stock among its 30 holdings: Intel, a longtime laggard within the sector.
Last, the Vanguard ETF is solely focused on the tech industry, one of the top-performing sectors of the previous three decades. The Dow, on the other hand, is loaded with lackluster stocks from underperforming sectors, including Verizon, 3M, and Boeing, to name just a few.
For all those reasons, the Vanguard fund has trounced the Dow. An investment of $10,000 in the Vanguard fund made 10 years ago would have grown to almost $64,000 today. The same $10,000 invested in the Dow would be worth less than $30,000.
VGT Total Return Level data by YCharts.
It's not the Dow's fault
Despite its recent underperformance, the Dow isn't a terrible index, it just has a specific mission.
The Dow Jones Industrial Average is meant to represent a broad array of U.S. companies spanning multiple sectors -- energy, industrials, finance, healthcare, consumer discretionary, etc. By contrast, the Vanguard Information Technology Index fund only invests in the tech sector, which has been perhaps the best one to invest in, given its rapid growth and high profitability.
So, we should all give the Dow a break -- it's just doing its job. And its diversified holdings may fit the needs of some investors better than a tech-focused index fund.
That said, for most investors, particularly growth-oriented investors, it's time to forget the Dow and load up on the Vanguard Information Technology Index Fund instead.
