4 Reasons to Bet on Dow Jones ETFs Now

Among the three key U.S. equity gauges, the Dow Jones won in 2022 only to lag the S&P 500 and the Nasdaq in 2023. SPDR Dow Jones Industrial Average ETF DIA has added 18.7% past one year, falling behind the S&P 500 (up 27.2%) and the Nasdaq-100 (up 48.5%). This year too, the Dow Jones has trailing (up 3.6%) the S&P 500 (up 7.1%) and the Nasdaq-100 (up 8.4%).

The Dow Jones lagged its peers because the Fed has been less hawkish in the past one year, which favored the growth-stock-heavy Nasdaq. The Dow Jones stocks are value stocks in nature that perform well in a higher rate environment.

Moreover, the recent rally in the S&P 500 and the Nasdaq was been attributed to the huge growth in “Magnificent Seven” stocks – Nvidia, Amazon, Microsoft, Apple, Meta, Alphabet and Tesla. Barring considerable exposure to these seven magic stocks, outperformance in any index seems impossible lately.

However, even if the Dow Jones underperforms its heavyweight peers in the past one year, there are some factors that can fuel the Dow rally in the coming days. Let’s delve a little deeper.

Amazon Joins Dow Jones

Notably, the Dow Jones is a smaller average than the S&P 500, with just 30 components, and it’s weighted by the share price of the stocks instead of the companies’ total market value. The three largest tech stocks in the Dow by market capitalization as of Friday were Apple, Microsoft and Salesforce, while key companies of latest Wall Street rally such as Nvidia and Alphabet were excluded.

On Feb 26, 2024, Amazon has officially joined the Dow Jones, taking the place of Walgreens Boots Alliance.With shares of the leading e-commerce platform soaring over 80% in the past year and bolstering the Wall Street rally, Amazon’s entry to the Dow Jones is very crucial for the blue-chip index’s future outperformance.

Based on short-term price targets offered by 43 analysts, the average price target for Amazon comes to $202.26. The forecasts range from a low of $123.00 to a high of $230.00. The average price target represents an increase of 15.58% from the last closing price of $174.99.

Steepening Yield Curve in the Cards?

As recessionary fears are ebbing and inflation has been falling, the Fed is likely to go slow in its policy tightening spree. The CME Fed Watch Tool reveals that there are 51.7% chances of rate cuts in June. Both situations will result in a steepening of the yield curve. A steepening yield curve is great for bank stocks as the pattern boosts banks’ net interest rate margins.

The financial sector, which accounts for around one-fifth of the S&P 500 Index, had a mixed Q4 this reporting season. But due to the steepening of the yield curve, financial stocks have been in a better position. Financial Select Sector SPDR Fund XLF is up 6.2% this year (read: Bank ETFs in Focus on Mixed Q4 Earnings).

Relatively Cheaper Valuation

Cheaper valuation is another tailwind. At the current level, Dow Jones has a P/E of 16.82X, whereas the S&P 500 has a P/E of 17.86X and the Nasdaq-100 has a P/E of 22.70X. Cheaper valuation provided the Dow index the scope to fare better in the coming days, if other factors allow. Against this backdrop, investors can bet on iShares Dow Jones U.S. ETF IYY and DIA.

Symmetric Sectoral Exposure

The Dow Jones has the highest exposure (21.66%) to financial stocks, followed by Information Technology (19.47%), healthcare (18.54%) and industrials (13.69%). Financial stocks are performing good this year. Healthcare stocks are recession-proof. UnitedHealth Group UNH, a prominent component of the Dow with 8.82% exposure, gained 4.1% past month after beating Wall Street estimates in its fourth-quarter results.

Information Technology giants, in any case, are in great shape this year, owing to the AI craze. Industrials stocks have also been trying to log a recovery, as evident by the space’s solid Zacks Rank of #3.

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UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report

Financial Select Sector SPDR ETF (XLF): ETF Research Reports

SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports

iShares Dow Jones U.S. ETF (IYY): ETF Research Reports

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Zacks Investment Research

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


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