DOW ETFs: More Upside Ahead?

Shutterstock photo

When Trump was elected as the President of the United States, the Dow Jones Industrial Average entered into a party mode. Looks like nothing can come in the way of the Dow Jones industrial average which has set itself on a steep upward trajectory since Trump's win.

In its northbound march, the blue-chip index crossed 25,000 for the first time in its  120-year  history on Jan 4. At the close on Jan 4, the Dow was at 25,075.13. The index breached the 20,000-mark on Jan 6, 2017 and the rest is history. Let's see what's driving such a monumental rally.

Tax Bill

Trump's pledges of fiscal stimuli and deregulation acted as the main tailwinds. The tax bill was passed in late December and cuts "the corporate rate from 35% to 21%, gives pass-through businesses like the Trump Organization a 20% tax deduction, raises the standard deduction, expands the child tax credit, and temporarily lowers individual rates across the board (read: Tax Bill: What ETF Investors Need to Know )."

Uptick in Manufacturing Activity

Manufacturing numbers point to a recovery in the United States. An uptick in manufacturing numbers can act as a strong tailwind to Dow Jones Industrial Average's forward growth, in our opinion. After all, Dow Jones-based ETF SPDR Dow Jones Industrial Average ETF Trust DIA invests about 20% weight, the highest allocation, in the industrial sector.

Notably, the U.S. manufacturing sector grew in December at the quickest clip in three months, as gains in orders and output marked the strongest year for factories since 2004 . The survey-based measure of factory activity for 2017 came in at 57.6, the best in 13 years. Needless to say, such data pushed the Dow Jones Index higher. Moreover, Trump's plans of increased infrastructure spending was instrumental in the Dow rally.

Oil's Recent Gains

Furthermore, it has been noticed lately that Dow Jones shares a deep relationship with oil price movement. Though the energy sector rally has spread optimism in the broader market as a whole, in most cases, on a particular day of oil surge, the spurt in the Dow Jones is steeper than that of the S&P 500, or vice versa (read: Oil Sees Strong Start to 2018 in 4 Years: ETFs to Play ).

Oil prices made a comeback recently. WTI fund United States Oil USO added about 22.7% while United States Brent Oil BNO advanced about 23.9% in the last three months (as of Jan 4, 2018).

How Long Will the Dow Rally Last?

If there are no further developments related to Trump's pro-growth policies in the coming days or in the oil patch, the rally is likely to stall. In any case, the U.S. market is guilty of overvaluation.

As per an article published on nytimes, we are presently in the second longest bull market . So, chances of pullback in an already inflated market are always there. Even if the sell-off is not acute, the index and the fund are likely to remain range-bound in the near term. This is because, most of the market drivers are in place.

ETFs in Focus

Still, investors intending a momentum play, can bet on DIA,  Guggenheim Dow Jones Industrial Average Dividend ETF DJD and  iShares Dow Jones US ETF IYY . Investors can also settle for leveraged Dow ETF plays as long as the trend favors them. Here,  ProShares Ultra Dow30 DDM and  ProShares UltraPro Dow30 UDOW are a couple of choices.

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.  Get it free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

US-OIL FUND LP (USO): ETF Research Reports

US BRENT OIL FD (BNO): ETF Research Reports

PRO-ULTR DOW30 (DDM): ETF Research Reports

GUGG-DJIA DVD (DJD): ETF Research Reports

PRO-ULT DOW30 (UDOW): ETF Research Reports

ISHARS-DJ US IF (IYY): ETF Research Reports

To read this article on Zacks.com click here.

Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
Referenced Symbols: USO , BNO , DDM , DJD , UDOW

More from Zacks.com




Equity Research

Research Brokers before you trade

Want to trade FX?