Should You Bet On Dow ETFs Over S&P 500?

Includes: DIA, DJD, DOD, IYY
by: Zacks Funds

Risk-on sentiments returned at the start of the week, catching a lift from receding Brexit fears. Most U.S. equity indices rallied with the Dow Jones Industrial Average gaining over 100 points. Investors started to position their portfolio taking cues of the fact that chances of Britain staying in the EU are higher.

Also, a dovish Fed meeting in June and chances of a delayed rate hike acted as catalysts to the rally. And most importantly, a rebound in oil prices on easing supply glut led the Dow Jones to stage a sturdy comeback this week. Investors should note that the index lost over 0.6% in the month-to-date frame (as of June 17, 2016) before springing back to gains on June 20, 2016.

Oil is a Crucial Factor

It has been noticed lately that Dow Jones shares a deep-seated relationship with oil price movement. In most cases, on a particular day of oil rout, the decline in Dow Jones is steeper than that of the S&P 500, or vice versa.

For example, over the last six months (as of June 20, 2016), Dow Jones-based SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) gained about 5.3% when WTI crude ETF (NYSEARCA:USO) added over 11.7%, while gains of the S&P 500-based (NYSEARCA:SPY) was slightly lower at 5%. Now, with bullish analyst projections like a possible $80/bbl oil by the end of 2017 doing rounds, there is a reason for being bullish on Dow-based ETFs too.

Upswing in Manufacturing Data

If this was not enough, manufacturing numbers point to a recovery in the U.S. As per the Institute for Supply Management (ISM), the manufacturing reading was 51.3 in May, up from 50.8 recorded in April.

Now that the Dow Jones Industrial Average Index has the top weight of 18.69% in industrial stocks, this recovery may lend a helping hand to the index and the related ETFs. Investors should note that SPY invests about 10% in industrial stocks.

Compelling Valuation

Notably, as of May 31, 2016, the P/E (TTM) of Dow Jones Industrial Average was 18.43 while the same for the S&P 500 was 23.62. As of the same date, price-to-cash flow of Dow Jones Industrial Average was 10.53 versus 20.41 of the S&P 500. The projected P/E of Dow Jones Industrial Index was 16.70 (as of May 31, 2016) while it was 17.26 for the S&P 500. From every perspective, Dow Jones Industrial Average speaks of decent valuation.

Income Lure

If this was not enough, a dovish Fed pushed the interest rates down to a lower territory. This in turn brightened the appeal for high-yielding securities. Notably, among the top ETFs, Jones Industrial Average-based DIA yields 2.70% annually (as of June 20, 2016) against SPY's 2.62% and QQQ's 1.37%.

ETFs to Play

Given this, we have highlighted some Dow ETFs that could be intriguing choices for investors seeking to ride a likely surge in Dow Jones.

SPDR Dow Jones Industrial Average ETF

The $11.9 billion DIA seeks to match the performance of the Dow Jones Industrial Average Index. The index is price weighted and measures the performance of 30 large cap stocks traded in the U.S. markets. The fund charges 17 bps in fees and jumped over 0.7% on June 20, 2016.

Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD)

This new ETF looks to give investors a way to target higher income producing securities in the U.S. market. This is done by tracking the Dow Jones Industrial Average Yield Weighted index. The ETF will charge 30 basis points a year in fees for the exposure.

The fund charges about 30 bps in fees and the 30-day SEC yield of the fund was 2.79% as of June 17, 2016. DJD added over 1.5% on June 20, 2016.


There is another product on the 'Dogs of the Dow' theme which provides investors a pure play to the 10 highest dividend-yielding securities in Dow Jones Industrial Average in equal proportions and charges 75 bps in annual fees. DOD tacked about 2.2% gains on June 20.

iShares Dow Jones U.S. ETF (NYSEARCA:IYY)

This $918 million ETF tracks the Dow Jones U.S. total market index which considers stocks from the Dow Jones U.S. Large-Cap Index, Dow Jones U.S. Mid-Cap Index, Dow Jones U.S. Small-Cap Index and the Dow Jones U.S. sector indices. The fund charges 20 bps in fees and added about 0.8% on June 20, 2016.