Investing in Dow Jones ETFs: everything you need to know
When it comes to investing in the Dow Jones index, a fairly common option for investors is Exchange-Traded Funds or ETFs. ETFs are investment funds that are traded on the stock exchange and replicate the performance of assets like indices such as the Dow Jones. In this article, we will see everything you need to know about this investment approach.
What is the Dow Jones?
Dow Jones may refer to different indices, but the most important one is the Dow Jones Industrial Average (DJIA).
The DJIA, and other Dow Jones indices, track the performance of selected stocks in the U.S. stock market. It was established in the 19th century by Charles Dow and his partner Edward Jones, and its name is a combination of both their surnames.
Distinct from other indices like the S&P 500, the DJIA value is determined by the price-weighting of 30 stocks. This means that stocks with higher prices have a greater impact on the index’s overall value.
Which companies are part of the Dow Jones index?
The Dow Jones Industrial Average is made up of 30 companies that lead the North American economy in different sectors, including healthcare, consumer goods, energy, technology, and finance.
The Dow Jones indices according to their composition are:
- Dow Jones Industrial Average: This is the most prominent index as it reflects the performance of the stocks from the 30 most influential companies in the United States.
- Dow Jones Utility Average: This index tracks the share price performance of the 15 most significant utility companies, such as those in the electricity and gas markets.
- Dow Jones Transportation Average: This index gauges the share performance of leading distribution and transportation companies.
- Dow Jones Composite Average: Lastly, this index measures the performance of the 65 stocks distributed among the three previous groups.
The companies that comprise the Dow Jones indices vary significantly; however, most of them are large-cap entities. A few of the current members of the Dow Jones include:
- 3M
- AMERICAN EXPRESS
- AMGEN
- APPLE
- BOEING CO
- CATERPILLAR
- CHEVRON
- CISCO SYSTEMS
- COCA-COLA CO
- DOW
- GOLDMAN SACHS GR
- HOME DEPOT
- HONEYWELL INTL
- IBM
- INTEL
- JOHNSON&JOHNSON
- JPMORGAN CHASE
- MCDONALD’S
- MERCK
- MICROSOFT
- NIKE -B-
- PROCTER&GAMBLE
- SALESFORCE
- TRAVELERS COS
- UNITEDHEALTH GRO
- VERIZON COMM
- VISA RG-A
- WALGREENS BOOTS
- WALMART
- WALT DISNEY
Have a look at Dow Jones Stocks with Best Dividends.
Investing in the Dow Jones via ETFs
Depending on your investment objectives, using ETFs to invest in the Dow Jones could be beneficial. If you’re seeking lower volatility compared to individual stocks, this can be a suitable alternative.
In general, ETFs provide benefits in terms of diversification, as they track the performance of all 30 DJIA stocks simultaneously. Moreover, it’s worth noting that ETFs can often be more profitable compared to other types of investments.
Through ETFs, you can employ various investment strategies, including long-term holdings. However, like all investments, investing in the Dow Jones via ETFs carries risk, and market volatility can significantly affect returns. Therefore, it’s advisable to thoroughly understand ETFs before investing.
To invest in the Dow Jones through ETFs, you need to register with a broker that supports ETF trading. Consider the following steps:
- Choose an ETF: For a prudent choice, opt for an ETF with a minimum level of assets of at least $10 million to ensure sufficient investor interest. Also, consider other factors like fees, long-term performance, liquidity, country of issue (ideally the UK), and leverage, among others.
- Select a broker: When choosing a trading platform, examine the services they provide, whether they offer a demo account, and, of course, the associated fees. Also, bear in mind the minimum deposit required and security features.
To get started, have a look at:
Costs of investing in the Dow Jones ETFs
When investing in the Dow Jones through ETFs, it is important to consider the associated costs. Generally, the key aspects you should keep in mind regarding costs are:
- Trading commissions (for buying or selling the ETF, if applicable)
- Management expenses
- Taxes
- Spread (if applicable)
- Custody and maintenance.
It is essential to understand the costs involved when investing in the Dow Jones through ETFs, as they can affect your returns and overall profitability.
Pros and cons of investing in Dow Jones ETFs
As with any other investment method, Dow Jones ETFs have advantages and disadvantages that you should know before investing.
Pros of investing in Dow Jones ETFs
- Instant diversification
- Access to leading companies in various sectors
- Availability of historical data
- Opportunity for long-term growth
- Convenience and minimum skills needed
Cons of investing in Dow Jones ETFs
- Market volatility risk
- Possible exposure to macroeconomic events
- Commissions and associated costs
- Possible impact of political and regulatory decisions
- Market downturn risks
Best ETFs to invest in Dow Jones index
As we highlighted before, if you are thinking of investing in Dow Jones ETFs, you need to ensure that you choose the most suitable ETF based on your needs.
Here are the top Dow Jones ETFs listed on London Stock Exchange:
- SPDR Dow Jones Industrial Average ETF (DIA)
- iShares Dow Jones US ETF (IYY)
- ProShares Ultra Dow30 (DDM)
- ProShares UltraPro Dow30 (UDOW)
Alternatives to investing in Dow Jones ETFs
You can invest in multiple other indices via ETFs, including:
- FTSE 100: you can invest in a basket of 100 companies listed on the London Stock Exchange with the highest market capitalisation. Have a look at the best FTSE100 ETFs.
- S&P 500: This stock index is one of the most well-known today and includes established companies from the United States. Investing in S&P 500 ETFs offers the opportunity to be exposed to a more diversified market.
- Nasdaq-100: This index groups a total of 100 highly prestigious and prominent companies in the US technology sector. It is a good option for those who want to invest particularly in this market. Check the best NASDAQ ETFs.
- Russell 2000: This stock index includes shares of 2,000 companies. It is an index that has been operating since 1984.
To buy ETFs safely, make sure you choose one of the best ETF brokers and consider other asset classes for diversification purposes, such as:
Dow Jones FAQs
What is the purpose of the Dow Jones?
The Dow Jones Industrial Average (DJIA), often referred to simply as “the Dow,” serves several important functions in the world of finance. For example, the Dow provides a clear, immediate picture of how the U.S. stock market is performing on any given day. It serves as a benchmark against which other investments or market sectors can be compared.
What are the benefits of investing in Dow Jones ETFs?
There are multiple benefits, including Dow Jones ETFs allowing investors to hold a diversified portfolio of 30 large-cap U.S. stocks with a single investment. This diversification can help reduce risk compared to investing in individual stocks.
What is the difference between the Dow Jones and the S&P 500?
The DJIA includes 30 large, publicly owned companies based in the United States, while the S&P 500 includes 500 of the largest companies listed on the New York Stock Exchange or NASDAQ.
Also, the DJIA was initially created to represent the industrial sector, but now includes companies from many sectors of the economy such as technology, healthcare, and consumer goods. The S&P 500 represents a broader range of sectors due to its larger number of constituent companies.
