DIA ETF: Taking A Look At The Component Level Of This Dow Jones Industrial Average ETF

Summary

• The Dow Jones Industrial Average (DJIA) is one of the oldest and the most widely followed equity indices.  Created by Charles Dow, it was first calculated in 1896.
• The DJIA, Dow Jones, or simply the Dow is a price-weighted measurement stock market index of 30 prominent companies.  Being price-weighted and only 30 stocks, many consider it as outdated.
• To help investors decide between the DIA ETF and SPY ETF, comparisons between the two indices behind both ETFs is part of this article.
• For investors looking to invest in the DJIA, the SPDR Dow Jones Industrial Average ETF is available but I am currently Neutral for starting a new position.

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Introduction

Source: macrotrends.net Log Scale

The Dow Jones Industrial Average (DJIA) was the second index started by Charles Dow, a WSJ editor, and his statistician business associate, Edwin Jones.  The first was the Dow Jones Transportation Average, as railroads were the major factor in the US economy in the 1890s.  The original DJIA had only 12 stocks.  It wasn't until 1928 that the DJIA expanded to 30.  Since its start, components have changed over fifty times.  The last change was 8/21/20, when Amgen (AMGN), Honeywell (HON), and Salesforce (CRM) replaced ExxonMobil (XOM), Pfizer (PFE), and Raytheon Tech (RTX).  In 2018, General Electric (GE) was the last of the original 12 to be removed from the DJIA.

The Index Committee is composed of three representatives of S&P Dow Jones Indices and two representatives of The Wall Street Journal.  Selection criteria is spelled out in the Index Methodology document.  

While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Since the indexes are price weighted, the Index Committee evaluates stock price when considering a company for inclusion. The Index Committee monitors whether the highest-priced stock in the index has a price more than 10 times that of the lowest. Maintaining adequate sector representation within the index is also a consideration in the selection process for the Dow Jones Industrial Average. Companies should be incorporated and headquartered in the U.S., and a plurality of revenues should be derived from the U.S.

Source: spglobal.com methodology pdf

The price-weighted structure made the originally-required hand calculations much easier than the preferred market-weighted rules almost every other index uses today.  Tradition keeps it going, though not by hand.  Being price-weighted means:

• Higher the price, greater the influence the stock has on the Index.  So when a stock splits 2-for-1, they lose half their influence on the Index's movement.  The number of shares outstanding has no effect on the index.
• When components change or there is a stock split with an Index component, the divisor is adjusted so those actions do not move the DJIA.  The current divisor is now near .132.

For more on the history on the DJIA, click here.  For details into the calculation methodology, click here.

Current Components of the DJIA

Source: wikipedia.org  Most start dates from Seeking Alpha

Eleven components started business before 1900.  On the younger side, four started after 1979, with Salesforce being the most recent startup (1999).

A deep drive into the SPDR Dow Jones Industrial Average ETF

Seeking Alpha describes this ETF as

SPDR Dow Jones Industrial Average ETF invests in stocks of companies operating across energy, real estate, materials, industrials, capital goods, commercial and professional services, consumer discretionary, consumer staples, health care, financials, information technology, communication services sectors. The fund invests in growth and value stocks of large-cap companies. The fund seeks to track the performance of the Dow Jones Industrial Average.

Source: seekingalpha.com DIA

DIA has accumulated $30.3b in assets and provides investors with a 1.6% yield. The ETF has 16bps in fees. DIA has over 100k followers in Seeking Alpha.

Source: seekingalpha.com DIA

I listed each stock within its Sector.  Each description is from the ticker's home page on Seeking Alpha. Click on the ticker to access that page.  

Consumer Discretionary:

Home Depot (HD): The Home Depot stores that sell various building materials, home improvement products, building materials, lawn and garden products, and décor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets and cabinet makeovers, countertops, furnaces and central air systems, and windows; and professional installation in various categories.

McDonald's (MCD):  McDonald's Corporation operates and franchises McDonald's restaurants in the United States and internationally. Its restaurants offer various food products and beverages, as well as breakfast menu. As of December 31, 2020, the company operated 39,198 restaurants. 

Nike (NKE): NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. The company offers NIKE brand products in six categories, including running, NIKE basketball, the Jordan brand, football, training, and sportswear. It also markets products designed for kids, as well as for other athletic and recreational uses, such as American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling, and other outdoor activities; and apparel with licensed college and professional team, and league logos, as well as sells sports apparel. 

Consumer Staples:

The Coca-Cola Company (KO): The Coca-Cola Company, a beverage company, manufactures, markets, and sells various nonalcoholic beverages worldwide. The company provides sparkling soft drinks; water, enhanced water, and sports drinks; juice, dairy, and plant–based beverages; tea and coffee; and energy drinks. It also offers beverage concentrates and syrups, as well as fountain syrups to fountain retailers, such as restaurants and convenience stores. 

The Procter & Gamble Company (PG): The Procter & Gamble Company provides branded consumer packaged goods to consumers in North and Latin America, Europe, the Asia Pacific, Greater China, India, the Middle East, and Africa. It operates in five segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care.

Walgreens Boots Alliance (WBA):  Walgreens Boots Alliance, Inc. operates as a pharmacy-led health and beauty retail company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The Retail Pharmacy USA segment sells prescription drugs and an assortment of retail products, including health, wellness, beauty, personal care, consumable, and general merchandise products through its retail drugstores. It also provides specialty pharmacy services and mail services. As of August 31, 2020, this segment operated 9,021 retail stores under the Walgreens and Duane Reade brands in the United States.

Walmart (WMT):Walmart Inc. engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores; membership-only warehouse clubs; ecommerce websites.  It operates approximately 11,400 stores and various e-commerce websites under 54 banners in 26 countries. 

Communication Services:

The Walt Disney Company (DIS): The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company’s Media Networks segment operates domestic cable networks under the Disney, ESPN, Freeform, FX, and National Geographic brands; and television broadcast network under the ABC brand, as well as eight domestic television stations. 

Verizon Communications (VZ): Verizon Communications Inc. offers communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. Its Consumer segment provides postpaid and prepaid service plans; internet access on notebook computers and tablets; wireless equipment, including smartphones and other handsets; and wireless-enabled internet devices.  As of December 31, 2020, it had approximately 27 million wireless retail postpaid connections and 482 thousand broadband connections. 

Energy:

Chevron Corporation (CVX): Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil, refined products, and lubricants.

Financial Services:

American Express Company (AXP): American Express Company, together with its subsidiaries, provides charge and credit payment card products, and travel-related services worldwide. The company operates through three segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. Its products and services include payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services. 

The Goldman Sachs Group (GS): The Goldman Sachs Group, Inc., a financial institution, provides range of financial services for corporations, financial institutions, governments, and individuals worldwide. It operates through four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. The company’s Investment Banking segment provides financial advisory services, including strategic advisory assignments related to mergers and acquisitions, divestitures, and corporate defense activities.  

JPMorgan Chase & Co (JPM): Morgan Chase & Co. operates as a financial services company worldwide. It operates in four segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. The CCB segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; mortgage origination and servicing activities; residential mortgages and home equity loans; and credit card, auto loan, and leasing services. 

The Travelers Companies (TRV): The Travelers Companies, Inc., through its subsidiaries, provides a range of commercial and personal property, and casualty insurance products and services to businesses, government units, associations, and individuals in the United states and internationally. The company operates through three segments: Business Insurance, Bond & Specialty Insurance, and Personal Insurance.

Visa (V): Visa Inc. operates as a payments technology company worldwide. The company facilitates digital payments among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a transaction processing network that enables authorization, clearing, and settlement of payment transactions. In addition, the company offers card products, platforms, and value-added services. 

Health Care:

Amgen (AMGN): Amgen Inc. discovers, develops, manufactures, and delivers human therapeutics worldwide. It focuses on inflammation, oncology/hematology, bone health, cardiovascular disease, nephrology and neuroscience areas.  The company has collaboration agreements with Novartis Pharma AG; UCB; Bayer HealthCare LLC; BeiGene, Ltd.; Eli Lilly and Company; and Datos Health.

Johnson & Johnson (JNJ): Johnson & Johnson researches and develops, manufactures, and sells a range of products in the health care field worldwide. It operates through three segments: Consumer Health, Pharmaceutical, and Medical Devices. The Consumer Health segment offers baby care products under the JOHNSON’S and AVEENO Baby brands.   The Pharmaceutical segment offers products in various therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, pulmonary hypertension, and cardiovascular and metabolic diseases. The Medical Devices segment provides electrophysiology products to treat cardiovascular diseases and neurovascular care products.

Merck & Co. (MRK): k & Co., Inc. operates as a healthcare company worldwide. It operates through two segments, Pharmaceutical and Animal Health segments. The Pharmaceutical segment offers human health pharmaceutical products in the areas of oncology, hospital acute care, immunology, neuroscience, virology, cardiovascular, diabetes, and women’s health, as well as vaccine products. The Animal Health segment provides discovers, develops, manufactures, and markets a range of veterinary pharmaceuticals, vaccines, and health management solutions and services, as well as a suite of digitally connected identification, traceability, and monitoring products. 

UnitedHealth Group Incorporated (UNH): UnitedHealth Group Incorporated operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight, and OptumRx. The UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, and individuals; health and well-being services to individuals age 50 and older.

Industrials:

The Boeing Company (BA): The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sales, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems, and services worldwide. The company operates through four segments: Commercial Airplanes; Defense, Space & Security; Global Services; and Boeing Capital. 

Caterpillar (CAT): Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. Its Construction Industries segment offers asphalt pavers, compactors, cold planers, motorgraders, pipelayers, road reclaimers, telehandlers, and utility vehicles; backhoe, compact track, multi-terrain, skid steer, and track-type loaders; forestry and wheel excavators; and site prep and track-type tractors.  

Honeywell International (HON): Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers auxiliary power units, propulsion engines, integrated avionics, environmental control and electric power systems, engine controls, flight safety, communications, navigation hardware, data and software applications, radar and surveillance systems, aircraft lighting, advanced systems and instruments, satellite and space components.

3M Company (MMM): 3M Company develops, manufactures, and markets various products worldwide. It operates through four business segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. The Safety and Industrial segment offers personal safety products, industrial adhesives and tapes, abrasives, closure and masking systems, electrical markets, automotive aftermarket, and roofing granules to industrial, electrical, and safety markets. 

Materials:

Dow (DOW): Dow Inc. provides various materials science solutions for consumer care, infrastructure, and packaging markets in the United States, Canada, Europe, the Middle East, Africa, India, the Asia Pacific, and Latin America. It operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials and Coatings segments. The Packaging & Specialty Plastics segment provides ethylene, and propylene and aromatics products; and polyethylene, polyolefin elastomers, ethylene vinyl acetate, and ethylene propylene diene monomer rubbers. 

Technology:

Apple (AAPL): Apple Inc. designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. It also sells various related services. The company offers iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; and wearables, home, and accessories.

Cisco Systems (CSCO): Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China. It provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.

Intel Corporation (INTC): Intel Corporation designs, manufactures, and sells essential technologies for the cloud, smart, and connected devices for retail, industrial, and consumer uses worldwide. The company operates through DCG, IOTG, Mobileye, NSG, PSG, CCG, and All Other segments. It offers platform products, such as central processing units and chipsets, and system-on-chip and multichip packages; and non-platform or adjacent products comprising accelerators, boards and systems, connectivity products, and memory and storage products. 

International Business Machines Corporation (IBM): International Business Machines Corporation provides integrated solutions and services worldwide. Its Cloud & Cognitive Software segment offers software for vertical and domain-specific solutions in various application areas; and customer information control system and storage, and analytics and integration software solutions.

Microsoft Corporation (MSFT): Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. Its Productivity and Business Processes segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business.

salesforce.com (CRM): salesforce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management worldwide. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support.

Dividend review

Source: seekingalpha.com DVD

While DIA has a dividend payment each month, the amounts vary widely as the stocks all pay on one of three quarterly cycles.  Seeking Alpha provides ETFs with a dividend score card.

Source: seekingalpha.com DVD scorecard

The grades reflect the fact most companies are mature in their life cycle and the fact the younger ones are retaining earnings in lieu of paying dividends that generate a high yield.

Using the Seeking Alpha Portfolio tool, I collected data from several pages to generate this overview table of all 30 stocks.

Source: seekingalpha.com Portfolio

While Value and Growth grades vary widely, all but three rate "A" or better on the important Profitability scale.  While Boeing and Salesforce not paying dividends was expected, I was surprised the Disney has not restarted paying one.   All 30 stocks rate well by both SA authors and Wall Street analysts and in their Quant score.

DIA or SPY?

Besides the price-basis of the DJIA, another criticism of that index compared to the S&P 500 is the number, or lack there of, stocks in the DJIA.  Here is a overview of the differences in the two indices:

Source: spglobal.com

The DJIA will never include Transportation or Utility stocks since they have their own Dow Jones indices.  While not excluded, the Real Estate sector is not represented and unlikely to be. 

Source: spglobal.com

The Index characteristics do not give a clear view as to the better choice in this author's view.  The DJIA is 100% Large-Cap stocks whereas the S&P 500 has about 16% in Mid-Small-Cap stocks.  As one would expect, DJIA's performance is almost twice as tied to how the Top 10 perform than its counterpart.  The fundamentals seem evenly split between the two indices.

Using the SPDR S&P 500 Trust ETF (SPY) as proxy for the S&P 500 Index, here is how the sector weights vary between DIA and SPY.

Source: www.etfrc.com

More important than the number of stocks, investor concern should be the sector differences between the two indices, as represented by these two ETFs.  Four sectors differ by more than 4% each.   Sector performance differs as the economy goes through its cycle.

Source: spglobal.com

Over the last 20 years the S&P 500 has better returns, but at 30 years, the DJIA is ahead.  In more recent times, the S&P 500 has also shown less volatility.  The indices have provided wide differences in returns during short periods.   It would be great to figure out how to capture this variation!

Source: spglobal.com

Data by YCharts

While neither ETFs is for income seekers, DIA consistently yielded more to investors.  The Sharpe ratio shows more of a mixed picture.

Portfolio Strategy

Either ETF appears to provide investors looking for Large-Cap exposure with about the same results.  DIA definitely has more concentration risk than SPY and less likely to include new growth stocks like Tesla (TSLA).

While Mid- and Small-Cap have historically outperformed their Large-Cap cousins, SPY's 16% allocation to these stocks might explain some of the performance deviation between the two ETFs but in the long-run hasn't helped SPY to generate a superior return. 

The Seeking Alpha home page for each ETF shows the above grades.  Their grading system slightly favors SPY, most distinctly for Momentum.  Being concerned about a market pullback, I am Neutral on both DIA and SPY at this time.   Hale Stewart recently submitted DIA:Hold That Position in which he reviewed the macroeconomic backdrop effecting the DJIA stocks.