In this article, we’ll cover: 

• What is the Dow Jones Industrial Average (DJIA)?
• How to invest in the DJIA: ETFs vs. mutual funds
• Investing in the DJIA with a mutual fund 
• Investing in the DJIA with an ETF
• Pros and cons of investing in the Dow Jones
• How to invest in the Dow: FAQs

Read on to learn how to invest in the Dow Jones Industrial Average. 

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average, or simply the Dow, is a stock market index made up of 30 big, well-known ‘blue chip’ companies in the United States. Think of it as a group of companies that represent a quick snapshot of the overall health of the U.S. stock market. The Dow, in particular, is one of the oldest and most widely used indices to examine what’s happening in a stock market.

The Dow Jones includes companies across the spectrum, from energy to health care. Here are the 30 companies in the DJIA by price weight as of November 2023: 

The Dow Jones holds companies from almost every stock market sector, falling into three main sectors: health care (20.8%), financials (19.8%), and information technology (18.8%). The only sectors excluded from its index are transportation and utilities, which have their own Dow Jones indexes.

So, how do you invest in the Dow Jones? For new investors, the best way is through an ETF or index mutual fund. While there are some differences between the two that we’ll explain below, funds are a low-barrier, low-cost way to gain exposure to the DJIA and diversify your portfolio. 

How to invest in the Dow Jones: index mutual funds vs. ETFs 

Since the Dow Jones is simply a measure of its underlying stocks’ performance, you can’t invest in it directly—instead, you can invest with an index fund either through a mutual fund or an ETF that strives to match the performance of the market index. 

A mutual fund is a basket of hundreds of stocks, securities, and other assets within a single fund. Instead of purchasing a single stock, funds give you exposure to all the different shares it contains, providing instant diversification for your portfolio. 

Index-based ETFs and mutual funds both aim to mimic the performance of an index like the Dow Jones, but there are a few differences between the two. 

Investing in the Dow with a mutual fund

Index-based mutual funds that track the Dow Jones Industrial Average usually include most (if not all) of the index’s 30 companies. This is so they can match the performance of the index as closely as possible. 

There’s a handful of Dow Jones mutual funds to choose from, but the following criteria can help guide your selection: 

• Minimum investment: index funds will have varying minimum investments, so be sure to check that the minimum amount aligns with how much you have to invest. 
• Expense ratio: since index funds are passively managed, the expense ratio (the ongoing cost of holding the investment) tends to be low. Look for a fund with the lowest expense ratio. 
• Dividend yield: if your index fund comes with dividends, which many do, be sure to compare the dividend yield (the amount investors are paid in dividends) of different funds you’re considering. Some may be higher than others, and capitalizing on dividends is a great way to boost returns. 

Investing in the Dow Jones with an ETF

Like index mutual funds, index ETFs allow investors to pool their money in a fund holding a selection of stocks, bonds, and other assets. Unlike index mutual funds, however, which can only be traded once a day at the end of each trading day, ETFs can be traded like a stock—meaning their share prices can fluctuate throughout the trading day. 

There are different types of ETFs, and not all of them track a particular index. Some ETFs correspond to a particular sector, industry, or market. To invest in the Dow with an ETF, you’d want to purchase an index-based ETF. The key factors to pay attention to aren’t much different from that of an index mutual fund:

• Minimum investment: in many cases, ETFs will have a lower minimum investment than index funds—sometimes, you might only need to pay the amount of a single share to get started. 
• Expense ratio: always compare expense ratios for ETFs you’re considering, and look for one with the lowest expense ratio possible. 
• Dividend yield: compare the dividend yields of ETFs you’re considering, and ensure it’s as high as possible to boost your returns. 
• Record of the ETF provider: consider the experience and track record of the provider of the ETF you are considering. Look for reputable providers with a strong track record of managing and administering ETFs.

Follow these steps to buy an ETF: 

1. Open an investment account: you can sign up with a traditional brokerage or through a robo-advisor, where you’ll find many ETFs to choose from. 
2. Add funds: decide how much capital you’re able to invest and add the funds to your account. 
3. Choose and buy your ETF: once you’ve decided on an ETF, purchase it through your brokerage account. Be sure to use the key criteria listed earlier to compare expense ratios and dividend yields. 

Pros and cons of investing in the DJIA

Investing in the Dow Jones Industrial Average is a popular way to diversify your portfolio and build wealth. In the case of a Dow Jones index fund or ETF, you gain exposure to some of the world’s most well-known and established companies without spending hours researching individual stocks. 

Pros

In general, the benefits of investing in the Dow Jones Industrial Average outweigh the disadvantages. 

• Consistent long-term returns: the Dow Jones has a long history of strong performance, with an average annual return of around 10% since its inception in 1896.
• Instant diversification: if you invest with an index fund, you gain exposure to an array of companies, industries, and sectors that instantly diversify your portfolio. This means that if one company or industry underperforms, the overall impact on the index and your portfolio is likely to be mitigated.
• Blue-chip stocks: the DJIA includes some of the most well-known and established companies in the world, such as Apple, Boeing, and Coca-Cola. These companies are often referred to as “blue-chip” stocks and are considered to be reliable long-term investments.

Cons

While the benefits of investing in the Dow Jones Industrial Average outshine the drawbacks, there are still a few to be aware of. 

• Limited scope: the DJIA only includes 30 companies, which is a pretty small sample size compared to other indexes. This means that it may not be representative of the broader stock market or the economy as a whole.
• Price-weighted: the Dow is a price-weighted index, meaning that companies with higher stock prices have a greater influence on the index than companies with lower stock prices. 
• No exposure to international companies: since the Dow only includes U.S.-based companies, it won’t provide stock exposure to companies in other parts of the world. This is less of a concern for new investors, but spreading your portfolio across different regions is another diversification strategy. Investors who want exposure to international markets will need to look elsewhere.

Investing made easy.

Start today with any dollar amount.

Get Started

FAQs about how to invest in the Dow Jones

Still have questions about how to invest in the Dow Jones Industrial Average index? Find answers below. 

What is the best way to buy the Dow Jones?

For new investors learning how to invest in the DJIA, buying an index fund over hand-picking individual stocks often produces better results. Staying invested for the long haul also minimizes the effects of market volatility and increases your odds of seeing the positive returns that the market has historically provided.

Should I invest in the Dow Jones through an ETF or index mutual fund? 

One of the main differences between index-based ETFs and index mutual funds is that ETFs tend to require a lower minimum investment to get started. For new investors without much money to invest upfront, a DJIA ETF is a low-cost option. 

What is the minimum investment for the Dow Jones?

For a Dow Jones index mutual fund, many come with no minimum investment. For a Dow Jones ETF, you might need to pay the full price of a single share—but some investment apps like Stash offer fractional shares for as little as $5. 

Can you invest in the DJIA with individual stocks?

Yes. If you don’t want an index mutual fund or ETF, you can hand-select individual stocks of companies from the Dow you want to invest in. Keep in mind that investing in a single company increases the risk and volatility of your investment, and will require thoughtful research and stock performance analysis. 

The post How to Invest in the Dow Jones Industrial Average appeared first on Stash Learn.

Index funds are attractive to new investors because they provide built-in diversification, meaning your money is spread out across many different companies. This can help reduce risk and provide a good foundation for long-term growth. Plus, index funds often have lower fees compared to other investment options, which means more of your money can go towards building your wealth.

If you think index funds might be right for your portfolio, this guide will get you started.

In this article, we’ll cover:

• How index funds work
• Pros and cons of Index Funds
• Types of index funds
• What to consider with choosing index funds

How index funds work

A market index is a measuring tool that helps people understand how the economy is doing and how different groups of investments are performing. It’s like a yardstick that measures the overall performance of certain assets, such as stocks or bonds, or even specific sectors like healthcare or an ethical stance like socially responsible investing.

Instead of trying to beat the market, an index fund aims to match the performance of one or more market indexes. It does this by buying securities, which are things like stocks or bonds, that are included in the index. Essentially, the fund tries to replicate the investment holdings of the market index it is tracking.

While you can’t directly invest in market indexes, investing in index funds is a close alternative. When you invest in an index fund, you become a shareholder and own a portion of the fund. Depending on the holdings of the fund, you might receive dividends, which are a share of the company’s profits, or interest from bonds, as well as capital gains distributions when the fund sells securities that have increased in value. But they don’t buy and sell securities frequently, index funds are typically tax efficient.

There are thousands of market indexes available today; some of the most well-known include:

• S&P 500
• Nasdaq Composite Index
• Wilshire 5000 Total Market Index
• Dow Jones Industrial Average

It’s important to note that a stock index is not the same as a stock exchange. The index tracks the performance of a specific market, while the exchange is the actual place where stocks are bought and sold.

Understanding market indexes and their role as measuring tools can help investors make informed decisions and choose index funds that align with their investment goals.

Pros and cons of index investing

Index funds typically follow a passive investment strategy, with fund managers buying and holding stocks to maximize earnings over the long run. Market indexes are rebalanced periodically, often once a quarter or once a year, and index funds generally adjust the fund’s holdings to match. In contrast, other types of funds may employ an active strategy, which attempts to outperform the market or target some other specified outcome. This usually requires more frequent trades and adjustments to the fund’s composition. 

Many investors prefer the hands-off investing strategy offered by index funds and benefit from their lower costs and consistent performance. However, it’s important to note that index funds are not designed to beat the market, so they will trail their underlying indexes most of the time. And while index funds may be useful for portfolio diversification, all investment comes with risks like market downturns and underperformance.

Advantages of index funds:

• Diversification: Because funds contain many different securities, there’s some built-in diversification. The level of diversification will vary, though, since an index fund focused on one sector may be less diverse than one that mirrors the overall stock market.
• Lower costs: Index funds usually are passively managed, which means investor costs and expense ratios tend to be lower compared to actively managed funds.
• Hands-off investing: An index fund is not an actively managed fund. Once you invest in an index fund, you can generally sit back and let the fund do its work. This low-maintenance approach is appealing to many investors who prefer a more hands-off passive investing strategy.
• Consistent performance: Index funds have historically shown consistent performance over the long term. For example, funds that track well-known indexes like the S&P 500 have a strong performance record. However, it’s important to remember that past performance is not a guarantee of future results, and index funds may not always outperform the market.
• Tax efficiency: The tax implications of investing in index funds may be a bit different compared to other types of funds. Taxes on dividends and short-term capital gains are usually the same as your income tax rate, while earnings on investments held for more than a year are subject to the lower capital gains rate. Index funds usually produce lower dividends and hold stocks for a longer period of time, which can make them more tax efficient.  

Disadvantages of index funds:

• Limited upside potential: Index funds are not designed for rapid or significant growth that beats the market, and they may trail the performance of the index they aim to match.
• Lack of flexibility: Because an index fund is committed to duplicating performance, a falling index could mean shrinking returns; passive management can reduce the flexibility to respond to decreasing performance.
• No protection from market downturns: While they provide diversification benefits, index funds are still subject to market risks. If the market has a bad day or enters into a bear-ish period, chances are the index fund will reflect that negative performance. 
• Underperformance due to index composition: While an index fund aims to conform to an index’s performance, there is always the risk it won’t. Performance is dependent on the composition and weighting of the underlying index, so if the index includes underperforming stocks or sectors, the index fund will suffer. 
• Diversification isn’t guaranteed: While index funds invest in a variety of securities, the level of diversification can vary. If a fund is tied to a specific market sector, all of its assets may lose value if that sector experiences a downturn. It’s important to consider the diversification characteristics of the specific index fund you are investing in.

Types of index funds

If there’s a sector, asset class, or another type of investment you’re interested in, there’s likely an index that tracks it. And, more often than not, there’s a fund dedicated to mirroring the index’s performance. Here’s a look at common types of index funds you may encounter, including broad market, equity, sector-specific, international and global, bond, balanced, and socially responsible index funds.

Broad market index funds 

Also called total market index funds, broad market index funds aim to replicate the performance of an entire market, such as the U.S. stock market. They generally buy thousands of different securities across multiple sectors, providing investors with broad exposure to the market and greater portfolio diversification.

Equity index funds 

These funds seek to match the performance of specific stock market indexes. For instance, a fund might target the S&P 500 or the Nasdaq Composite. Some of these funds focus on a single index, while others might track multiple stock indexes. If you want to invest in the biggest and most well-known companies, these funds can help you do just that.

Sector-specific index funds

As the name implies, these index funds focus on a specific market sector. They might use a sector-specific stock index or target one category within a more general index, such as stocks in the consumer staples category of the S&P 500. So, if you’re passionate about a particular industry or believe in the potential of a specific sector, these funds can help you invest with a laser focus.

International and global index funds

These index funds allow you to invest in securities outside the U.S. by targeting the performance of another country’s index. Investing in funds connected to international indexes, like the Nikkei in Japan or the DAX in Germany, could help level out some of the volatility in your domestic portfolio. It’s like broadening your investment horizon and exploring opportunities beyond your home country.

Bond index funds

Also known as fixed-income index funds, bond index funds target bonds instead of stocks. They invest in securities like government and municipal bonds, with the goal of matching a particular bond index. If you’re looking for investments that offer more stability and regular income, bond index funds can be a good fit for your portfolio.

Balanced index funds 

These index funds invest in multiple types of securities, and often include a mix of 60% stocks and 40% bonds. They usually try to match at least one stock index and one bond index. Balanced index funds offer a balanced approach to investing, combining the growth potential of stocks with the stability of bonds. It’s like having a well-rounded meal for your portfolio.

Socially responsible index funds

Socially responsible investing (SRI) index funds hold stocks in companies that aim to have positive community, environmental, or social impacts. Many SRI indexes focus on companies with high MSCI ESG ratings, which measure a company’s resilience to long-term, financially relevant ESG (environment, social, governance) risks. If you want your investments to align with your values and make a positive difference in the world, socially responsible index funds can help you invest with purpose.

Factors to consider for choosing an index fund

Like all investment strategies, what works for you depends on your financial goals. Remember that index funds are not designed for short-term investing, so choose a fund that you’re interested in for the long haul. In addition to knowing your risk tolerance and time horizon, there are several factors you should consider before choosing an index fund. 

• Expense ratio: Each fund has an expense ratio, which compares the fund’s total operating expenses, including fees, with the amount of its assets. Expense ratios can help you get a sense of whether fees are likely to be higher or more moderate when comparing funds. 
• Tracking error: Fund performance usually doesn’t correspond perfectly with index performance. Tracking error is when managers achieve returns above or below the index. A well-managed index fund should closely mirror the performance of the index it’s tracking, so look for one with a 1% to 2% tracking error.
• Fund size and liquidity: Index funds can track small, medium-sized, or large companies, all of which have different levels of risk and potential reward. Different funds may also have different levels of liquidity, which refers to how easily you can sell your shares and redeem them for cash.
• Investment objective and strategy: Consider which index or indexes a fund follows, the areas the fund focuses on, and the asset types available. Look for funds whose objectives and strategies align with your own investing goals.  
• Historical performance: Past performance is no guarantee of future performance, but historical data can be useful. Understanding how the index has weathered past ups and downs may provide helpful context for your investment decisions.

Diversifying your portfolio with index funds

What is an index fund’s role in your portfolio? It depends on your goals. Index funds can be a useful starting place for beginners, as they make diversification easier. And if you’re focused on long-term growth, index funds may play a prominent role in your strategy. Some investors also leverage index funds as a hedge against volatility; the generally steady growth of these funds may balance out the ups and downs of more volatile stocks in your portfolio.

There are many options available that will help diversify your portfolio and start you on the road to your long-term financial goals. If you see a place for index funds in your portfolio, Stash can help you start investing in them today.

Investing made easy.

Start today with any dollar amount.

Get Started

The post What Is an Index Fund and How Does it Work? appeared first on Stash Learn.

• Stocks
• Bonds
• Funds

Stocks and bonds frequently form the building blocks of portfolio and investment strategy. Because they tend to perform differently under different market conditions, investors can use this variance to help meet their investment goals. 

Forms of investment

Here’s an overview of these different types of investments, where and how to invest in them, and the part they can play in your portfolio.

Stocks

Purchasing a stock means buying a small piece of ownership, or a share, in a company. Stocks are bought and sold on stock exchanges. Generally speaking, stock prices rise and fall based on investor demand. Most of the time, the more people want to purchase a particular stock, the higher the price is likely to be. When fewer people want that stock, the price may drop.

You can potentially make money on stocks by selling your shares at a higher price than you paid for them. But stock prices can be volatile, meaning they may rise and fall quickly. Investor demand and stock prices fluctuate for any number of reasons. For example, good news, such as strong sales numbers or the unveiling of a popular new product, could cause stock prices to rise. Bad news, like product safety issues or poor revenue numbers, could cause stock prices to fall.  After prices fall, it can take a while for them to recover. That’s one of the reasons stocks are often held as a long-term form of investment.

Not all successful investment strategies involve holding stocks for long periods, however. More sophisticated investors, such as hedge funds, might use different types of investment strategies designed to generate returns over the short term, such as shorting a stock. Investors using this strategy start by borrowing stocks, then selling them quickly in the hope they can buy them back later at a lower price. If they can, they return the stocks to their original owner and keep the difference in price as profit.

Other sophisticated strategies include using stock options, which are contracts that allow investors to buy or sell a given stock at a set price and time. Options allow investors to bet markets will rise and offer some downside protection. For example, if you buy an option for $20 a share and prices go up to $30, you can use your option to buy shares at the lower price before selling at the higher price. If you buy the same option for $20 per share and stock prices fall, you’re under no obligation to use the option to buy.

You may also get a return on your investment through dividends, which are a share of the company’s profits. Companies typically face a choice between spending their earnings to research and develop new products or distributing them to shareholders as dividends. Many established companies with predictable revenues and expenses choose to divide a portion of their earnings among investors as a regular cash dividend during the year.

Dividends can also make stocks more attractive to investors, as consistent dividend payments are a sign of consistent profits. Since share prices generally rise when stocks become more attractive, dividends can amplify returns in two ways: by paying investors in cash and by increasing stock prices and returns over time.

Bonds

Bonds are interest-bearing securities issued by companies or governments. Investors can purchase them for a set amount of time, known as a bond term. Bonds are a form of debt that the issuer takes out, similar to a loan; in this case, you are “loaning” the issuer money when you purchase the bond. In exchange for this loan, the company or government promises to pay you interest and repay the original amount of the loan when the term is up. Generally speaking, interest is paid regularly in the form of a “coupon.”

Bonds have three basic components: 

• The price at which you buy them
• The interest rate that’s used to calculate your coupon 
• The yield, or return an investor receives between the time they purchase the bond and the end of the loan term 

The interest rate stays the same throughout the life of the bond, while the bond’s price will usually change based on the movement of interest rates in the economy.

Those price changes happen because bonds become more or less attractive to other investors based on a combination of current interest rates and the return another investor could get buying a new bond. When interest rates go down, older bonds that pay higher coupons may become more appealing, which can drive their price up.

The opposite happens when interest rates go up: The price of older bonds that pay lower coupons generally goes down. It’s important to remember that in either case, the interest rate you get paid for holding the bond remains the same.

Stocks vs. bonds: risks and returns 

Over the long term, stocks may offer higher returns than bonds. Since 1926, stocks from large companies have returned an average of 10% per year. For 2020 and going forward, however, the projected compound return for large U.S stocks is forecast to be about 4%. But because stock prices can be volatile, they are usually considered a more risky form of investment than bonds. Unless the bond issuer defaults, you’ll receive a fixed return over the life of the bond, in addition to having your principal repaid. That’s one reason bonds are also called fixed-income investments.

The lower risk associated with bonds often translates into lower long-term returns compared to stocks. Government bonds, which are backed by the United States Treasury, have returned between 5% and 6% since 1926. Bonds issued by private companies, or corporate bonds, range in quality based on the likelihood that their issuer will be able to make timely payments. In most cases, the highest-quality corporate bonds pay more interest than government bonds, even though large, established blue-chip companies are unlikely to default on their payments.

On the other end of the spectrum, companies with a shakier track record and a higher risk of default tend to issue bonds with much higher interest rates. While these so-called junk or high-yield bonds offer investors a better return, the chances that investors actually receive all their payments are substantially lower.

Building a portfolio of stocks and bonds

While you can buy a single stock or bond, many investors choose different types of investment vehicles that help them build a more varied portfolio. This strategy is called diversification: a form of investment that helps investors spread the risk of poor performance among multiple securities. That way, if a particular business or industry runs into trouble, other more successful businesses or industries can help balance out your returns. Investment products such as mutual funds, exchange-traded funds (ETFs), and index funds offer investors opportunities to buy a range of stocks, bonds, or a mix of both. 

Different types of investment vehicles 

Mutual funds

A mutual fund consists of a basket of investments chosen by fund managers. When you buy a share in a mutual fund, you buy a share of the portfolio. Buying a share of the portfolio means you’re buying a fraction of a share from each of the stocks and/or bonds the fund holds. 

Mutual fund prices are determined at the end of the trading day and depend on the total price of all the assets in the fund’s portfolio. At the end of each day, mutual funds calculate their per-share price, or net asset value. The total value of the portfolio is divided by the number of outstanding shares held by investors. That calculation provides the price at which shareholders can buy or sell.

Exchange-traded funds (ETFs)

ETFs are a form of investment similar to mutual funds. Both hold a basket of investments, and owning a share equates to owning a fraction of a share of each of the stocks and/or bonds the fund holds. However, shares of ETFs trade on exchanges all day long, just like individual stocks. As a result, the price of a share in an ETF can fluctuate throughout the day based on stock market demand.

Index funds

The investment professionals who build mutual funds and ETFs usually have a strategy in mind. Often, that means investing in a variety of stocks or bonds with similar traits, such as large companies, small companies, or companies from a certain industry or a particular part of the world. Index funds are a type of mutual fund or ETF that matches the companies making up a major stock or bond index, such as the S&P 500, the Dow Jones Industrial Average, or the Bloomberg Barclays Aggregate Bond Index. These funds aren’t actively managed by investment professionals. Consequently, buying shares of these funds tends to have lower costs than actively managed mutual funds or ETFs.

How to get started with different types of investments

Whether you’re looking to invest in stocks, bonds, or funds, you generally need to open a brokerage account or another specialized account like a 401(k) or an IRA. You can also purchase government bonds online directly from the U.S. Treasury.

Your goals will help you determine the different types of investment options you choose. Brokerage accounts can be good for short-term investment goals, since they provide relatively easy access to your money. Retirement accounts may be advantageous for long-term goals, since they don’t allow easy withdrawals. 

Stash has boiled down its investing philosophy into the Stash Way, which includes leveraging various forms of investment for a diverse portfolio, investing regularly, and investing for the long term.

The post What are the different types of investments? appeared first on Stash Learn.