S&P 500 ETF vs. Dow Jones ETF: An Overview
Exchange-traded funds (ETF) that track the S&P 500 Index and the Dow Jones Industrial Average (DJIA) are some of the most widely traded ETFs in the market today.
Both ETFs have essentially the same amount of risk associated with them. The Dow ETF tracks only 30 companies whereas the S&P ETF tracks all 500 of the S&P 500, making. Both of these ETFs have a high degree of correlation, meaning they move in the same direction much of the time, and both have similar holdings overall. However, there are distinct differences between the two funds.
- The SPY is the SPDR S&P 500 ETF, which tracks the 500 companies in the S&P 500 index.
- The DIA is the SPDR Dow Jones Industrial Average ETF, which instead tracks the 30 Dow components.
- Although the ETFs share some similarities, they track different indices and are constructed differently, so investors should understand the key differences.
The S&P 500 ETF
The SPDR S&P 500 ETF Trust (SPY) tracks 500 companies from the S&P 500 index. The companies included in the ETF are chosen by a committee, and as a result, the holdings can differ slightly from the S&P 500 index. The committee uses guidelines for its decisions including liquidity, profitability, and balance. The committee meets regularly to review the index.
The S&P 500 Index is constructed using a weighted average market capitalization, which means larger companies have a greater weighting in the index. Market capitalization is the result of multiplying a company's stock price by the number of outstanding shares of stock. As a result of the weighting, companies with the largest number of shares and have a high stock price will carry a higher weighting.
Below is a breakdown of the fund as of Oct. 12, 2021 and its top holdings. The fund has a low expense ratio of 0.0945%, which is the cost of managing the fund expressed in percentage terms. The SPY has over $386 billion in assets under management (AUM).
Here are the top five industries that are represented in the fund as of Oct. 12, 2021:
- Information Technology: 27.53%
- Health Care: 12.93%
- Consumer Discretionary: 12.43%
- Financials: 11.56%
- Communication Services: 11.08%
Here are the SPY's top five holdings as of Oct. 12, 2021:
- Apple (AAPL): 6.02%
- Microsoft (MSFT): 5.96%
- Amazon (AMZN): 3.83%
- Alphabet Inc. Class A (GOOGL): 2.23%
- Facebook (FB) Class A Shares: 2.09%
Anywhere from 50 million to 70 million shares trade daily depending on market conditions. The SPY has a fairly low risk with a beta of 1.0, although it can fluctuate.
Beta is a measure of how much a security fluctuates in the market and its risk level. A beta of one means a security trades in line with the market. A beta of below one has low risk when compared to the market, and a beta above one is said to have a higher risk than the overall market. Since the SPY includes many companies in the market, its beta is usually close to one, meaning it moves in line with the market.
The Dow Jones Industrial Average ETF
The SPDR Dow Jones Industrial Average ETF Trust (DIA) tracks some of the largest companies in the U.S. whereby the companies that are included are chosen by a committee of editors from the Wall Street Journal. There are no technical rules for inclusion in the index. The component companies must be substantial enterprises that represent a significant portion of the economic activity in the U.S.
The DJIA contains 30 companies, compared to the 500 companies in the S&P 500. The DJIA is the second-oldest stock index dating back to 1896. The SPDR Dow Jones Industrial Average ETF is the largest ETF tracking the DJIA.
Below is a breakdown of the fund as of October 12, 2021 and some of its top holdings. The fund has an expense ratio of .16%, which is low but slightly higher than the SPY. The DIA has over $29 billion in assets under management (AUM), which is more than $357 billion less than the SPY.
Some of the industries that are represented in the fund as of October 12, 2021 along with their weightings include:
- Information Technology: 22.68%
- Financials: 16.92%
- Health Care: 16.13%
- Industrials: 15.39%
- Consumer Discretionary: 14.09%
- Consumer Staples: 7.34%
- Communication Services: 4.30%
- Energy: 2.05%
- Materials: 1.11%
Some of the DIA's top holdings as of October 12, 2021 and their weightings include:
- UnitedHealth Group Incorporated: 7.72%
- Goldman Sachs Group Inc.: 7.40%
- Home Depot Inc.: 6.47%
- Microsoft Corporation: 5.61%
- Salesforce.com Inc.: 5.34%
- McDonald's Corporation: 4.68%
- Visa Inc. Class A: 4.29%
- Boeing Company: 4.28%
- Honeywell International Inc.: 4.10%
- Amgen Inc.: 3.87%
Approximately two to three million shares trade daily depending on market conditions. The DIA has a slightly lower risk level than the SPY with a beta of .99, and although it can fluctuate, the difference is negligible.
The Correlation Between SPY and DIA
The SPY and DIA have a high degree of correlation meaning that when the S&P 500 rises, so too does the Dow Jones as well as their respective ETFs. The high degree of correlation is due to the similar component companies of each index. The DJIA contains only very large companies.
Most of these companies are also included in the S&P 500. However, the weightings might be different, meaning the amount of money allocated to the companies will vary when comparing the two funds. Although the S&P 500 provides more diversification, the overall market tends to move in the same direction given economic conditions.
The Bottom Line
Whether the SPY is better than the DIA depends on the investor's investment objectives. If an investor is looking for a fund that's more heavily weighted in industrial companies, the DIA is a good choice.
On the other hand, if someone is looking for more technology and bank stocks, the SPY is a better choice given the weightings outlined above. However, it's important to note that the weightings can change over time.