Want To Own The Dow? There’s An ETF For That

Published on Tuesday, 14 February 2012 20:43 Written by Todd Shriber

New York, February 14^th (TradersHuddle.com) – While the S&P 500 is the more accurate gauge of broader market action and the most important of all U.S. stock indexes, the Dow Jones Industrial Average is still widely followed by the financial media, professional money managers and retail investors. Some of that may have to do with the fact that the Dow is one of the oldest U.S. indexes and some the Dow’s popularity can certainly be attributed to the fact that many of its 30 holdings are among the most venerable names in their respective industries.

Fortunately, investors do not need to own all 30 of the Dow’s components individually to own the index. A more cost-effective approach comes from the world of ETFs in the form of the SPDR Dow Jones Industrial Average (NYSE: DIA). DIA closed just below $129 on Tuesday meaning it’s more cost prohibitive to own one share of International Business Machines (NYSE: IBM) than it is to own DIA share.

Figuring out how DIA is weighted isn’t hard. Just remember that the Dow itself is a price-weighted index, meaning its highest priced component, IBM, represents the biggest percentage of the index. Conversely, Bank of America (NYSE: BAC), the lowest priced Dow stock, represents the smallest slice of the Dow’s pie.

So IBM gets an 11.3% allocation in DIA. Caterpillar (NYSE: CAT) is next at almost 6.7% and Chevron (NYSE: CVX) is third at 6.25%. Just work down to Bank of America and you’ll get the order of DIA’s lineup.

There was a time when the Dow and its components had a much heavier industrial feel to them, but American business has changed. Today, industrials represent 22.3% of DIA’s weight, still the largest sector weight, but technology, consumer staples, energy and consumer discretionary names also receive double-digit allocations. Financials, health care, telecom and materials round out DIA’s sector exposure.

Again, the utility of DIA lies in the fact that is a cost-effective approach that active traders and conservative investors alike can use to access the Dow’s entire roster. Based on Tuesday’s closing prices (rounded up and down to nearest even numbers) owning one share of each Dow component would cost more than $1,700. Assuming DIA is trading at $129 that means you can grab 13.1 shares of DIA for the same price as just one share of all 30 Dow stocks. Sounds a pretty good deal, right?

The vitals: DIA debuted in early 1998 and has an expense ratio of 0.18%. With almost $11.7 billion in assets under management, DIA is the sixteenth-largest U.S. ETF by assets and the tenth-largest ETF focused on stocks.