Dow Jones Beat the S&P 500 in 2022: 3 ETFs to Invest in the Dow

Why the Dow?

Investors new to the DJIA should give my previous article on it a read. In that article, I went over its construction, methodology, and historical performance. 

This article will focus on the possible reasons behind the DJIA's performance as defined by its exposure to certain Fama-French factors, namely investment and profitability. 

Both of these factors play a large role in creating "quality" stocks, which have historically produced better returns. The factors are defined as follows:

• Investment: The returns of companies with conservative investments minus the returns of companies with aggressive investments (Conservative minus Aggressive, or CmA).
• Profitability: The returns of companies with strong operating profitability versus the returns of companies with weak operating profitability (Robust minus Weak, or RmW). 

For an excellent summary of the power of these two factors, I suggest reading this article from the CFA institute, which notes: 

"Over all economic cycles since 1963, going long high quality stocks, or profitable firms, and shorting their low quality, unprofitable counterparts has been a great investment strategy. And the power of the factor has not diminished."

I performed a factor regression of the most popular DJIA ETF on the market, the SPDR Dow Jones Industrial Average ETF Trust (DIA) against the SPDR S&P 500 ETF (SPY). The regression was done using monthly returns over a 36-month roll period. 

Compared to SPY, DIA had much higher loadings for investment and profitability, and a surprisingly slightly higher loading for value (HmL). It had a negative loading to size (SmB), which is expected given that it is entirely comprised of large-cap stocks. 

Historically, DIA has outperformed SPY from 1999 to the present on both a trailing and rolling return basis, with better risk-adjusted returns and lower drawdowns. 

Dow ETF options

If you're convinced by this (keeping in mind that backtests are rearward looking and should not be used to predict future results), then the most straightforward ETF option for investing in the DJIA is DIA. This ETF is price-weighted like the DJIA is and costs a 0.16% expense ratio. 

If you're not a fan of the date price-weighting methodology, a good alternative could be the First Trust Dow 30 Equal Weight ETF (EDOW), which simply holds all 30 of the DJIA stocks in an equal-weight allocation. However, it does charge a much higher expense ratio of 0.50%. 

A really interesting DJIA ETF in my opinion is the Invesco Dow Jones Industrial Average Dividend ETF (DJD), which uses a variation of the "Dogs of the Dow" strategy by holding stocks based on their 12-month dividend yield over the prior year. DJD is pretty cheap too, with a 0.07% expense ratio. 

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.