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.

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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.

Whether you call this stock index the Dow, the Dow Jones, DJIA, or by its full and gloriously long name, the Dow Jones Industrial Average is a name you’ve heard at some point or another. And since you’re here, it’s likely a name and stock index you’d like to become more familiar with.

The Dow Jones Industrial Average has an incredibly rich history, leaving a heavy footprint on how we gauge the United States stock market to this very day. In the world of finance, the Dow Jones index provides a snapshot of how its selected companies are performing in the stock market and is an indicator of the overall health of the U.S. economy.

In this article, we’ll cover:

• Why the Dow matters
• History of the Dow Jones Industrial Average
• Stocks included in the Dow
• How the Dow is calculated
• The Dow vs other market indexes
• How to invest in the Dow Jones

Why the Dow Jones matters

Investors and financial analysts use the Dow as a benchmark to compare the performance of their own investments or portfolios. Because indexes like the Dow hold companies from a wide range of economic sectors, investors can gain a quick understanding of how the market is performing and whether a particular section of the economy is weakening.

History of the Dow Jones Industrial Average

So who exactly is ‘Dow Jones’? The Dow was named for an existing company, but Dow and Jones were real people that made an unforgettable impact on Wall Street and the investing world. 

Like any good story, this one begins with friendship. Financial journalist, Charles Dow, and statistician, Edward Jones, met in the late 19th century while working at the Providence Evening Press. Both shared a fascination with the financial markets and recognized the need for a better, unbiased system of reporting on stocks and other financial instruments.

After leaving the Providence Evening Press in 1882, Dow and Jones headed to New York to found their own financial news service, the Dow Jones & Company. The pair, along with their silent partner, Charles Bergstresser, later went on to create The Wall Street Journal.

Creating the Dow Jones index

Charles Dow wanted to create a way to track the overall performance of the U.S. stock market. He selected 12 companies that he believed were representative of the economy at that time including companies like General Electric, American Tobacco, and U.S. Leather. 

Here are the original 12 companies the Dow first tracked:

• American Cotton Oil
• American Sugar
• American Tobacco
• Chicago Gas
• Distilling & Cattle Feeding
• General Electric
• Laclede Gas
• National Lead
• North American
• Tennessee Coal and Iron
• U.S. Leather
• U.S. Rubber

You can see the companies selected for the index fall into the industrial category, giving more meaning to the word ‘industrial’ in the index’s name. 

And with that, the Dow Jones Industrial Average was officially established and debuted on May 26, 1896, in The Wall Street Journal. Now that’s good publicity.

How the Dow Jones changed over time

Since its creation, the DJIA has changed significantly to reflect changes in the economy and the stock market. The index’s list of 12 companies grew to 20, then grew to 30, and companies were removed and replaced throughout the years by its averages committee on an ‘as-needed basis’.

In 2018, General Electric (GE), the last remaining company from Charles Dow’s original selection, was removed from the index. After underperforming in its sector for several years, the company was replaced with Walgreens. This move allowed the Dow to be more representative of the consumer and healthcare sectors and better reflect the US economy.

Today, the DJIA includes companies from a range of sectors, including technology, healthcare, and consumer goods. 

Companies on the Dow Jones Industrial Average in 2023

The Dow Jones includes companies across the spectrum, but primarily holds blue chip companies representing the industrial and consumer goods sectors. Each company within the index is selected because they’re considered leaders in their sectors. Here are the 30 companies in the DJIA by index weight as of 2023: 

Most of these companies fall into three main sectors: information technology (21.65% of the DJIA), health care (17.58%), industrials (15.78%), and financials (15.57%). 

How is the Dow Jones Industrial Average calculated?

The Dow Jones is calculated by taking the sum of the stock prices of the 30 companies and dividing it by a number called the Dow divisor. The Dow divisor is a constant that is adjusted to account for changes in the stock prices and any corporate actions, such as stock splits or mergers.

To calculate the value of the Dow, the stock prices of each of the 30 companies are added up, and the sum is divided by the Dow divisor. The resulting number represents the current value of the Dow.

Dow Jones vs other stock indices

All stock market indexes track market performance; how they do that differs from index to index. These indexes can track a certain group of stocks and are often grouped around a particular industry.

Unlike other stock market indexes, such as the S&P 500 and the Nasdaq Composite, which are market capitalization-weighted indexes, the DJIA is a price-weighted index. This means that a higher-priced stock will have a greater impact on the index’s value than a lower-priced stock, regardless of the company’s size or market capitalization.

Another difference between the Dow and other stock market indexes is the number of companies it tracks. The DJIA tracks only 30 companies, while the S&P 500 tracks 500 companies and the Nasdaq Composite tracks more than 2,500 companies.

So is one index better than another?

All three market indexes are widely used and highly regarded. But while the DJIA is used as a shorthand for the performance of the U.S. stock market, its narrow focus on just 30 stocks makes it a less comprehensive representation than the S&P 500, for example. Each index has its own strengths and weaknesses so as an investor, it’s important to look at more than one index.

Investing in the Dow Jones Industrial Average

So can you invest in the Dow Jones? Yes, but not directly. While you can’t invest in a market index, you can invest in the DJIA through exchange-traded funds (ETFs) that track the index, mutual funds that invest in companies included in the index, or by purchasing shares in the individual companies that make up the index.

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Dow Jones Industrial Average FAQ

How many stocks are in the Dow Jones?

The Dow Jones Industrial Average consists of 30 blue chip companies from a range of sectors, including technology, healthcare, and consumer goods. 

What determines which companies are in the Dow?

The DJIA has no hard and fast rules on how a company’s stock is added to its index. Besides the requirement of already being a security on the S&P 500, a stock is typically added only if the company has an excellent reputation, demonstrates sustained growth, and has a large number of investors interested.

Can you buy Dow Jones stock?

While you can’t buy the Dow Jone directly, you can invest in the DJIA through exchange-traded funds (ETFs) that track the index, mutual funds that invest in companies included in the index, or by purchasing shares in the individual companies that make up the index.

The post What is the Dow Jones Industrial Average (DJIA)? appeared first on Stash Learn.

But perspective is always important.

In context of other big stock sell-offs, the most recent drop wasn’t as significant as, say, the beginning of the financial crisis in 2008, when markets shed about half of their value, losing some $30 trillion of wealth.

Fact: The market goes up and down

As stock returns have headed steadily upwards in recent few years, it’s easy to forget something important: The market is normally volatile, which means it’s subject to swings, and there will be good years as well as bad years.

In fact in the course of most years, some experts say it’s normal for markets to experience something called a correction, which is when indexes drop 10% or more from a previous high.

Here are some tactics to think about

Diversify

It’s never smart to put all your eggs in one basket. It’s a good idea to consider investing in a mixture of bonds, stocks, sectors, industries, and geographies. Maybe you have too much in technology-focused funds, or blue chips, or small cap companies. The world’s a big place, and there are ten economic sectors to consider. You can invest in clean tech, cybersecuirty, and healthcare, to name a few other options. You can also invest internationally, in emerging markets, Asia, and Europe.

Consider putting money in bonds.

As the stock market has scaled ever higher heights in the past year, it’s likely your portfolio may be over-allocated toward stocks, because that’s where the big returns have been. Bonds, which are essentially IOUs from the federal and local governments, as well as companies, are generally considered safer investments. Since the financial crisis, bond returns have been pretty muted, at about 2%. But with short-term interest rates going up, the interest rate on longer-term bonds appears to be increasing too. The yield on 10-year Treasuries, for example, has risen about 0.5% over the past year to about 2.85%.

It’s important to remember, however, that bonds have risks tied to interest rate increases.  When interest rates go up, the price of bonds falls.

Think about

These are hard assets including metals (think gold, silver and nickel), grains, livestock, and foods. Commodities can act as hedge against inflation, according to some experts, since they tend to increase in value as inflation rises.

Inflation can have a negative impact on stocks. And as we wrote recently, fears about inflation have sparked some of the current market turmoil.

Commodities, however, can be volatile. As they are based on real-world products, they can be more subject to shocks related to supply and demand.

Don’t panic, you’re an investor

It’s important to keep in mind that there is no way to eliminate uncertainty from investing completely. But with some planning, it’s possible to minimize the risks you face in the market.

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