Dissecting The Struggling Dow Jones Industrial Average This Year [SPDR Dow Jones Industrial Average ETF]

dow 13000David Fabian: The Dow Jones Industrial Average (INDEXDJX:.DJI) is one of the oldest blue-chip indexes in existence.  This bellwether has survived for over 100 years as a time-tested indicator of mega-cap stock performance.  Nearly every investor can easily relate to the name recognition that the DJIA inspires, but few can probably name more than a handful of the 30 stocks that it tracks.

The index constituents have changed dramatically over the years as new companies are admitted to replace aging monoliths.  The underlying stocks are no longer solely focused in the industrial arena, but instead represent nearly every sector of the economy.  These shakeups can be attributed to technology advancement, social trends, stock value changes, and a host of other characteristics.  However, the one constant is that the index is weighted according to the price of the underlying stocks as opposed to market capitalization or other fundamental qualities.

That means that Visa (V), with a share price of $223, has a larger weighting than Exxon Mobil (XOM) which is currently trading around $94.  The fact that Exxon has a market capitalization that is nearly three times larger than Visa is completely ignored when the index is calculated.

Because of these anomalies, many contemporary investors have dismissed the Dow as an aging relic in the age of cutting-edge index formulation methodology.  In addition, the relatively small subset of just 30 stocks makes it hard to justify as a true sample of the market machinations on a daily basis.  While those arguments may be valid, I believe the Dow does still have some merit in modern investing practice and can be a valuable tool to extrapolate data.

The largest ETF that tracks this index is the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) which currently controls $11.6 billion.  DIA charges an expense ratio of 0.17% and curiously pays a monthly dividend yield which is rare for an equity-oriented ETF.

As you can see on the chart above, DIA has significantly underperformed high beta sectors such as the iShares Russell 2000 ETF (IWM) and PowerShares QQQ (QQQ) which have both broken out to new highs this week.  The hot money is all chasing growth stocks that offer the potential for superior price appreciation and is indicative of a fully engaged bull market that is seeing money shift away from larger established companies.  Over the last 52 weeks, QQQ has nearly double the performance of DIA.

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