Can you buy shares in the Dow Jones Industrial Average (DJIA)?

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October 2016
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You cannot buy shares directly in the index, but you have several options to mimic the index (some more precise than others):

1) Most Accurate (should mirror performance of the DJIA to the tee):

Create a portfolio with precisely the same composition as the DJIA by buying up the Index's 30 stocks, which are published daily in the Wall Street Journal. If you want to understand why simply adding the value of each of those stock prices does not give you the current value of the index, you must understand that stock splits, reverse splits, and other share-count adjustments which have no impact on value but significantly change the price per share (while the number of shares outstanding either rises or falls, exactly offsetting the change in price, as stock splits or reverse splits don't impact value). Because of the numerous splits and reverse splits, etc. executed by several of the companies within the DJIA over the years, the Wall Street Journal continuously updates a "Dow Divisor" figure to calculate the appropriate level of the price index, so that it doesn't give an inaccurate representation of index performance due to distortions to price caused solely from changes in a given company's share count. For example, if McDonald's (a member of the DJIA) was trading at $10/share and issued a 2-for-1 split, its share price would go to $5 while each shareholder would receive an additional share of stock, leaving their ownership value unchanged. Because the DJIA is a price-weighted index, without adjustment the index would look to have performed worse than in actuality due to this unadjusted, 50% decline in the value of 1 share of McDonalds' stock. The Divisor accounts for the cumulative value of splits and reverse splits over time, to keep a proper representation of index performance. But, if you just want to replicate index performance, you can simply create a portfolio comprised of the 30 stocks included in the dow, namely: MRK, KO, BA, JPM, MSFT, CSCO, PFE, HD, GE, UNH, GS, INTC, DD, WMT, DIS, CVX, AAPL, TRV, VZ, MMM, CAT, AAPL, UTX, AXP, NKE, PG, IBM, V, MCD, JNJ.

If you want to prove to yourself that your return performance each day mimics that of the DJIA, divide the daily return performance of your portfolio by the Dow Divisor provided daily in the Wall Street Journal or on the CBOE's website.

2) Very little tracking error, but not exact DJIA Performance: 

Purchase the ETF with the lowest tracking error relative to the DJIA - for 2016, the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA) takes the cake. It is also the one index that seeks to completely mimic the index composition, so the only tracking error (or difference in ETF returns vs. the actual performance of the index) comes from its very low Total Expense Ratio (TER) at only 0.17%. DIA is the largest and most liquid tracking fund. The fund’s only purpose is to track the daily performance of the DJIA. 

Tracking error SPECIFICALLY FOR THE DJIA, not to be confused with ETFs tracking other indexes with different weighting methodologies or asset classes, is primarily driven by the expense ratio of the ETF, as the Dow is otherwise relatively easy to replicate. You simply buy all 30 stocks that comprise the index, and re-balance where necessary. 

3) Can achieve returns exactly correlated with movements in the DJIA, but magnified on the upside and on the downside. If we want to find a way to essentially "invest in the DJIA," which is a non-investable benchmark index, we can get the exact returns on a long position in the DJIA (as if it were investable), magnified by 5x, by taking a long position in the E-mini DJIA futures contract. An investor can obtain five times the leveraged exposure to all the stocks in the DJIA for less than $5000 with margin trading on the E-Mini DJIA contract. The E-Mini contract represents $5 x the DJIA. So, for instance, the dow closed up 40 points to $18,203 today. The E-Mini DJIA contract returned exactly 5 times this amount, or $200 on the day. Futures on the DJIA trade quarterly, with nearly all the trading volume taking place in the nearest expiration month. 

4) You can also take a long position in the DJIA, though the upside will be magnified by 100, by taking long positions in call options on the index. Downside is limited only to the premium you pay for the option (if you think the index will rise, you buy calls; if you anticipate it will fall, you buy puts), giving you a beautifully asymmetric trade weighted to the upside. Losses are capped at the option premium, while gains are magnified by 100 (leverage) and are theoretically unlimited. Of course, for those unexperienced with trading, be sure to understand how options work before executing any positions as these can be considered risky investment vehicles.
 

October 2016
October 2016
October 2016
October 2016