- In the decade-plus since the post-global financial crisis bull market rally began, the DJIA has been crushed by top U.S. index benchmark peers the S&P 500 and Nasdaq 100.
- The fact the Dow is "price weighted" has meant high-flying growth stocks have been left out of the index relative to value-oriented names in underperforming sectors like healthcare and financials.
- In today's episode of Let's Talk ETFs, we discuss recent Dow outperformance - and why DIA's "weaknesses" have been transformed into strengths as investors rotate away from tech and growth.
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Editor's Note: A full transcript of this conversation will be published next week. Sign up to follow Let's Talk ETFs to be alerted when that article is available.
Just a few days after recording this podcast with WingCapital Investments' Vincent Yip, markets seemed to take the cue and fall into line with his thesis. Back on January 19 of this year, Vincent published an article, Time For The Dow To Shine This Year, in which he made a call for the DJIA to reverse a decade of underperformance versus the other two major U.S. benchmark indexes, the S&P 500 and Nasdaq 100.
See a full fund comparison here.
Over the last month though, DIA has outperformed SPY and QQQ on a nearly daily basis. Vincent believes there are several reasons for this, foremost among them DIA's sector composition relative to its peer indexes.
Source: Seeking Alpha DIA quote page
With funds like QQQ leaving out the Financials and Energy sectors completely, and underweighting Healthcare relative to DIA, it's no wonder that the rotation to value has catapulted DIA ahead of it.
The DJIA is a strange index, weighting components according to price, an archaic concept which may have made sense in 1886 when Charles Dow came up with the index. Practically speaking, this means UnitedHealth (UNH) at over $300/share is the index's largest component, with triple the allocation of Apple (AAPL) despite Apple being 7 times the market cap of UNH. And names with prices in the thousands of dollars like Amazon (AMZN) and Alphabet (GOOG) (GOOGL) are not up for consideration at all as their prices would mean allocations that overwhelm DIA's remaining holdings.
This "strangeness" should actually play to DIA's advantage as markets rotate from high flying growth stocks into value. This almost certainly not what Charles Dow intended when he created the DJIA more than 130 years ago. But the present reality is of an index that leaves out the high flying growth engines of the post-global financial crisis bull market in favor of more modestly priced names from sectors that have underperformed for more than a decade now. And that might be exactly what investors need to power their portfolios in 2021 and beyond.
- 5:00 - Revisiting Vincent's Vietnam thesis (VNM) (IEMG)?
- 9:15 - The Dow Jones Industrial Index: One of the best known, oldest and strangest indexes for U.S. investors (DIA)
- 11:00 - Is the Dow still relevant for modern investors?
- 16:30 - How bad has the underperformance of the Dow been relative to the S&P 500 (SPY) and Nasdaq 100 (QQQ)?
- 20:00 - Why does the Dow Jones Transportation Index's (BATS:IYT) breakout bode well for DIA's performance?
- 23:30 - How does the sector composition of DIA set it up for success in this environment?
- 27:00 - What are other ways you recommend playing this trend? (RSP)
This article was written by
Analyst’s Disclosure: I am/we are long VNM, IEMG, SPY, DIA, VOO, VLUE, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
WingCapital Investments' Vincent Yip is long VNM, IEMG, SPY, and long DJIA via futures. Jonathan Liss is long IEMG, VNM, VOO, QQQ, and VLUE.
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