The Dow Jones Industrial Average Index is one of the most-watched benchmark indices in the world. It is also the largest stock index by market capitalization in the US. It is due to this iconic status of the index that investors often wonder if it is possible to trade Dow Jones. The answer is that you can’t directly invest in Dow; you can invest in ETFs and funds that track the index’s value. Dow Jones consists of 30 blue-chip U.S. stocks from nine sectors.
How to trade Dow Jones:
There are mainly two options available to get exposure to Dow Jones. Either you can trade the Dow Joes or invest in it. The difference lies in the time horizon and the rationale. In trading, for example, you identify market trends and quickly buy or sell based on short-term factors. To bet on short-term price movements of Dow, you can trade cash indices or index futures.
On the other hand, investing involves buying stocks after a thorough analysis and holding the investments long-term after it has reached your target or you are convinced it will not reach it.
One way to invest in Dow Jones is to invest in each of the components of the index. This strategy, however, is not very practical as you’ll need to keep on changing the companies as they are added or dropped from the index. Moreover, it could be quite costly to buy each of the 30 components in the same ratio as the index. Therefore, investing in Dow through ETFs and index funds is much more practical and simple.
Dow Jones ETFs
Investing in a Dow Jones ETF means investing in a product that mirrors the performance of the Dow. These funds usually hold a basket of securities that diversify the risk and tracks the Dow. The SPDR Dow Jones Industrial Average ETF (DIA) is the largest non-leveraged Dow ETF and one of the most popular. It invests in all the Dow components with weights as assigned by the underlying index. The top holdings for DIA include Apple, Home Depot, and UnitedHealth Group among others. Its expense ratio is 0.17 percent.
iShares Dow Jones US ETF (IYY) is another ETF that tracks the Dow. It usually invests at least 90 percent of its assets in securities of the underlying index. It has an expense ratio of 0.20 percent.
ProShares Ultra Dow30 (DDM) also tracks the Dow. It is a leveraged ETF that seeks to replicate twice the daily performance of the index. To achieve its objective, this ETF invests in equity securities in the index, derivatives, futures contracts, and money market instruments. Its expense ratio is higher at 0.95 percent. ProShares Short Dow 30 ETF (DOG), on the other hand, moves in the opposite direction of the Dow.
There are other ETFs that seek to replicate Dow’s returns but with a weighting based on their objective. Invesco Dow Jones Industrial Average Dividend ETF (DJD), for example, weighs Dow stock based on their trailing 12-month yield.
Dow Jones Index Funds
Index funds are passive funds whose portfolio mirrors the securities of a particular index. This is done to match the performance of the said index. This could either be a mutual fund or an ETF. The index tracking the Dow Jones would invest in all the 30 components of the index. One advantage of holding index funds is their relatively lower expense ratios.