DIA Or SPY?

| About: SPDR Dow (DIA)

Summary

This is an explanation of the Dow Jones Industrial Average and the Standard & Poors 500.

Charts will show the performance of each average going as far back as 1970.

Finally, the EFT's DIA and SPY will be compared to these indexes.

The Dow Jones Industrial Average (DJIA) and the Standard & Poors 500 (S&P 500) are the two popular indexes to measure the stock market. Which is the better index? Why are there two indexes that measure the general stock market? Can I invest in either of these indexes myself? These questions will be explored now. This article was written on December 5th, 2017, so all data presented is from closing stock prices on that day.

DJIA was first calculated in 1886 and consisted of 12 stocks. In 1928, the number of stocks in the index grew to 30 individual stocks where it remains to this day. This was in the days before computers, so the stock prices were added together and divided by the number of companies in the index to achieve the stock price. Over the years, with stock splits, mergers, and additions and deletions of companies, the divisor changed from 30 to a different number, when any of these events took place. With this methodology, stocks with higher per share prices would weigh more heavily in the DJIA. Market cap didn’t matter, only the individual stock price. Here is the current weight of each stock. If Boeing were to vote for a 2:1 split, its Dow weight would drop to below 4%. GE has dropped over 11% in the last month, but since its weighting factor is ½ of a percent, the negative impact was only about 16 points. If Boeing had dropped by the same percentage, it would have dragged the DJIA down by 225 points.

The current version of the S&P 500 which included 500 companies, originated in 1957. Unlike the DJIA, S&P 500 weights each stock by the market cap to determine an individual factor. So Apple currently has almost a 4% weight, and Campbell Soup Company has only a 0.04% weight (100 times smaller) since its market capitalization is much smaller than Apple. Every company in the DJIA is a component of S&P 500. In fact, since the DOW stocks have large market caps, together they control almost 29% of the S&P 500. Currently, Microsoft and GE are the only Dow stocks that have a larger impact on the S&P 500 than they do on the DJIA.

It is possible to easily invest money in these indexes without going to the trouble of purchasing the individual stocks. Two of the most popular funds are the SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF (SPY). These funds seek to correspond to the averages they represent. Here is some basic information about them.

DIA

SPY

Gross Expense Ratio

0.17%

0.09%

Total Assets

20 billion

253 billion

Premium to NAV

+- 0.01%

+-0.08%

Dividends paid

Monthly

Quarterly

Dividend annual Yield

1.95%

1.81%

So which fund is the best choice? Both have ultra-low expense ratios. In fact, if you had $10,000 invested in SPY, the management fee would be only $9 per year. They are extremely liquid, popular funds. Also, these funds trade at net asset value, and barely trade at a discount or premium. So there is no risk of selling when the funds are at discounts to NAV. Let’s see how the funds performed vs. the theoretical numbers. The following chart will show how each fund compares with the underlying index. I could only find numbers for SPY and DIA going back to 1997 and 1999 respectively, so I wanted to see how a $10,000 investment in either of these funds would have performed compared to buying the actual averages (dividends reinvested in all examples). The yearly difference is .12% in DIA and .06% with SPY. This validates the gross expense ratio given for each fund.

DIA

SPY

Initial investment

10,000

10,000

Start Date

1/1/99

1/1/99

End Date

12/31/16

12/31/16

S&P 500/DJIA

32,324

25,438

SPY or DIA ETF

31,548

25,144

Difference

776

294

Yearly %

0.12%

0.06%

Since the two funds closely follow their respective index, I used the S&P 500 and DJIA data (dividends reinvested) to see how these two indexes performed over the past 47 years.


The next chart shows how each fund did in 9 different decades, dividends reinvested. The S&P 500 performed better in the early years, but the DJIA had slightly better performance after that. I haven’t studied the underlying stocks, but I think that the Silicon Valley stocks in the late 1970’s and early 80’s greatly helped the S&P 500 average.

The data indicates that either fund obtains similar results. The S&P 500 has more exposure to technology stocks like Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB). These have done quite well in the last year. In the event of a market correction, these stocks may be hit harder than most. So I personally favor DIA.

Here is one final chart that shows the computation of the DJIA for Dec. 5th, 2017.

Name

Ticker

Dow Weight

Stock Price 12/05/2017

Boeing

BA

7.85%

275.54

Goldman Sachs

GS

7.07%

248.33

3M

MMM

6.78%

238.26

United Health

UNH

6.27%

220.09

Home Depot

HD

5.21%

182.85

McDonald's

MCD

4.93%

172.99

Apple

AAPL

4.83%

169.64

IBM

IBM

4.42%

155.35

Caterpillar

CAT

3.99%

140.14

Johnson & Johnson

JNJ

3.98%

139.67

Travelers Companies

TRV

3.85%

135.32

Chevron

CVX

3.43%

120.39

United Technologies

UTX

3.43%

120.29

Visa

V

3.09%

108.58

Disney

DIS

3.05%

107.22

JPMorgan Chase

JPM

3.01%

105.72

American Express

AXP

2.81%

98.71

Wal-Mart

WMT

2.79%

97.83

Procter & Gamble

PG

2.60%

91.4

Exxon

XOM

2.36%

82.89

Microsoft

MSFT

2.32%

81.59

DowDuPont

DWDP

2.04%

71.54

Nike

NKE

1.72%

60.42

Merck

MRK

1.59%

55.77

Verizon

VZ

1.45%

50.92

Coco-Cola

KO

1.32%

46.26

Intel

INTC

1.24%

43.44

Cisco

CSCO

1.06%

37.31

Pfizer

PFE

1.01%

35.63

General Electric

GE

0.51%

17.76

Totals

100.00%

3,511.85

Dow Divisor

0.145233969

Dow Jones Price 12/5/17

24,180.64

Information in this article has been compiled by me and is believed to be accurate. However, I make no representation about the accuracy or reliability with respect to this report.

Finally, keep in mind that I am not a financial planner. This information is provided for your consideration only. Comments are appreciated.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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