The Dow Jones Industrial Average (DJIA) is an index reflecting the average price of the 30 stocks included in the measurement. Therefore, as it is simply a calculated average, you cannot invest in the index itself. However, there are certain investment products available that yield similar results to the performance of the index.
You can purchase shares in each of the 30 companies currently included in the Dow Jones Industrial Average. While seemingly simple, this can be costly, with the price per share over $100 for many of the component companies. Then, you need to sell companies as they are dropped from the index and buy the replacement companies, as the Dow Jones changes periodically. For most investors, this is not a plausible way to invest.
Instead, look for index funds linked to the Dow Jones or exchange-traded funds (ETFs) that track the index. Investing in these funds requires a far smaller initial cash outlay, while offering performance that mirrors that of the Dow Jones. For example, the SPDR Dow Jones Industrial Average ETF (DIA), trades at roughly 1/100 of the Dow Jones index price. Your investment moves at a nearly identical percentage with the index, up or down. Some funds even offer the opportunity to play the Dow Jones in a bear market, like ProShares Short Dow 30 ETF (DOG). This fund moves in the opposite direction from the Dow Jones, so in a bear market, you can buy shares of DOG and see your share value increase as the Dow Jones falls. No matter which you choose for your portfolio, and regardless of the time in the market, these funds make owning a piece of Dow Jones performance attainable.
The Advisor Insight
You cannot buy shares in the Dow Jones Industrial Average (DJIA), but you can buy an exchange-traded fund that tracks the index and holds all 30 of the stocks in proportion to their weights in the DJIA. An interesting variation of this strategy is an ETF that follows the “Dogs of the Dow” strategy by concentrating on only the 10 highest-yielding stocks on the index, which are typically the most reasonably priced. Historically, this strategy has delivered impressive returns over time, but there have also been multi-year periods where it generated disappointing performance. Another ETF uses leverage (borrowing) to provide twice the daily performance of the DJIA, although this is very risky as it also has the possibility of yielding twice the loss.
Sound Asset Management Inc.