Can you buy shares in the Dow Jones Industrial Average (DJIA)?
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.
Index Funds and ETFs
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.
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.
You can invest in the Dow Jones Industrial Average by investing into each company in the Dow Jones Industrial Average Index proportionality to their representation in the index. Here are the components http://indexarb.com/indexComponentWtsDJ.html. This can get expensive and time consuming. Another option is to invest in the ETF with the symbol DIA. This is an index fund which is meant to replicate the performance of the Dow Jones Industrial Average.
The Dow Jones Industrial Average is an index. The components of the index are periodically adjusted to accurately reflect the industrial makeup of the US economy. The DJIA is not a fund, however there are several Exchange Traded Funds (ETFs) that are structured to mimic the behavior of the DJIA. The biggest of these is the SPDR Dow Jones Industrial Average ETF (DIA) which invests in all the Dow stocks with the same weighting as the index.
You cannot buy the DJIA index directly. However, you can buy the components of the DJIA to replicate the index
The DJIA reflects the average price of its 30 component stocks. Hence you can buy each of the 30 stocks to construct a mirror of the index.
You can also buy an ETF that mimics the DJIA index. For instance, DIA. This ETF is doing all the heavy lifting of buying the appropriate number of appropriate shares and replacing them as needed when the DJIA's composition changes.
No. The DJIA is an index. There are ETFs and mutual funds that try to mimic the DJIA by holding the securities that are in the DJIA. Such funds can come close, but the management charges of the ETF plus the commission ,or broker fee charged to acquire the ETF, will cause a tracking error such that the actual performance of the ETF will be slightly less than the DJIA itself.