For over a hundred years, the Dow Jones Industrial Average
(DJIA) has been serving as the primary benchmark of American stock
performance. Although the benchmark certainly has its limitations
its longevity is unmatched and its reign over investor perceptions
about stocks is legendary.
Still, while the market has certainly shifted a great deal from
the time in which the Dow was first created, the benchmark has been
relatively flexible and able to alter its focus away from the
industrial-focused economy of the past and more on the
service/knowledge economy we see today (read
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Beyond the DJIA, investors also have the S&P 500, which some
argue is actually the better benchmark for stock market
performance. This benchmark consists of a much biggest basket of
stocks and utilizes a different weighting system in order to track
American stock performance.
Either way, investors have a great deal of options including
taking an ETF approach for the benchmarks. The
SPDR S&P 500 ETF (
SPDR Dow Jones Industrial Average ETF (
are two such products by State Street Global Advisors which track
the S&P 500 and the DJIA, respectively.
However, before discussing the pros and cons of each of these
ETFs it is important to understand the differences between the two.
The following section discusses some of the key differences:
Weighting Methodology and Index Construction
The DJIA is a price weighted index composed of 30 large cap
stocks in the U.S. equity market, contrary to its counterpart
S&P 500 which is a market capitalization weighted index and
consists of 500 stocks.
Earlier, the value of DJIA used to be computed on a simple
average basis by adding the price of each component and dividing it
by the number of components. However, presently the index
construction employs a Dow Divisor to incorporate management based
changes such as stock splits and dividend payouts (see
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Relative Movement within the Index
This implies that companies with higher market price would
receive a more superior weighting than a company with a lower
price. Therefore the index is more biased towards stocks with a
higher share prices like IBM, instead of low price ones like Alcoa
(AA). For example, the index value will be more sensitive to a 10%
change in a $100, than a 10% change in a $50 stock, regardless of
how big the companies actually are.
On the contrary, the S&P 500 averages out the percentage
change of each component on its portfolio as it employs a market
capitalization weighted technique. Therefore, a 10% change in a
$100 stock and a 10% change in a $50 stock will be dependent on
their number of shares outstanding (Note: Market capitalization
equals price per share multiplied by the number of shares
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Small Sampling Bias
The components of DJIA include only those stocks which are
considered to be leaders in their respective industries since the
index is composed of a small sample of 30 stocks. On the flip side,
the S&P 500 gives a more holistic picture of the economic
trends in the U.S. since it consists of a sample size which is
16.67 times that of the DJIA.
Given this fact, one could argue that the S&P 500 is a
better indicator of sector as well as broad based trends in the
U.S. equity market.
The Apple Effect
Yes, it's true. Everybody's favorite - Apple Inc, is not
included in the portfolio of the Dow. One reason could be the fact
that in earlier days the DJIA was only composed of stocks that were
traded on the New York Stock Exchange when Apple Inc was traded on
However, it is widely believed that with a current market price
of well north of $650/share Apple Inc would severely distort the
index value even with minor price changes. International Business
Machine Corp (IBM) is the company with highest price weight in the
DJIA. As of September 27
2012, IBM was trading at $205.91 (see
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Nevertheless, despite these differences, it is noteworthy that
on an average, over the past 3 years, the one month rolling
correlation between the two indexes is 98%. The same has hit a
maximum of 99.7% and never gone down below 78%. Therefore,
statistically there doesn't seem to be much of a difference between
the two and their overall performance over long time periods.
Coming back to the ETFs, the table below compares the two across
various parameters that should be considered by investors before
taking an investment decision.
1 Year Returns
Std. Deviation (Risk)
Average Daily Volume
5.56 million shares
145.70 million shares
Note: i) 1 Year and YTD returns as of 26
September 2012. ii) Standard deviation is three year annualized
and as of 26
As the table suggests, there isn't much to be compared in terms
of total returns between the two ETFs. Both these broad based ETFs
have generated phenomenal returns over the past 12 months.
Both DIA and SPY have returned around 25% amidst major positive
developments from both sides of the Atlantic which have restored
investor confidence in the riskier asset classes such as equities
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). However, on a year-to-date basis SPY with returns of 16% has
outperformed DIA which has returned 12%.
SPY has an asset base of $118.03 billion compared to $11.47
billion for DIA. Also, SPY has a phenomenally high average daily
volume of 145.03 million shares whereas DIA has an average daily
volume of 5.56 million shares.
So while both are extremely liquid and widely held, most
investors would probably be better off in SPY as opposed to DIA.
While it is true that DIA pays out a more robust yield, SPY has
seen better returns so far this year and it charges less in
expenses, making it a potentially low cost-and undoubtedly more
diversified-choice in the U.S. large cap market.
Both DIA and SPY have a
Zacks ETF Rank of 3 or 'Hold' with a 'Medium' risk
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SPDR-DJ IND AVG (DIA): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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