Dow Jones ETFs in focus as index reaches historic 20,000 milestone

Jan 26th, 2017 | By | Category: ETF and Index News

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The Dow Jones Industrial Average (DJIA) has broken through the 20,000 level for its first time in history, gaining over 1,700 points since President Donald Trump’s victory in November, and highlighting investors’ optimism about the future of the US economy under the new President’s stewardship. The bullish run has led to significant gains for investors in exchange-traded funds tracking the index.

Dow Jones ETFs in focus as index reaches historic 20,000 milestone

The Dow Jones Industrial Average has gained over 1,700 points since President Donald Trump’s victory in November.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown, commented: “The Trump jump has propelled the DJIA to an unprecedented level, as investors pile into US stocks in anticipation of lower corporate taxes and more government spending.”

Although the milestone holds no fundamental significance, it is viewed by many as psychologically important.

The DJIA, a price-weighted average of 30 stocks traded on the New York Stock Exchange and the NASDAQ, was devised in 1896 by Charles Dow, a US journalist also known for starting the Wall Street Journal. It is one of the oldest, single most-watched indices in the world and is a reflection of the health of the broad US economy.

The original constituents were virtually all industrial in nature, reflecting the make-up of the US economy at the time. As the US economy has evolved, so has the constituents within the index. Today the index comprises several financial companies, such as JP Morgan Chase and Goldman Sachs, as well as technology giants such as Intel, Apple and IBM. Coca-Cola, Johnson & Johnson, McDonalds, Pfizer and Walt Disney are also current constituents. The current weighted-average market cap of the index is $181bn.

The largest sector holdings are current industrials (19.8%), financials (17.6%), information technology (17.6%), consumer discretionary (14.5%) and health care (12.5%). The largest individual constituents are Goldman Sachs (8.0%), 3M (6.1%), IBM (6.1%), Boeing (5.5%) and UnitedHealth (5.5%).

Only one of the original 12 constituents – General Electric – has managed to remain in the index throughout its history, indicating the dramatic change that the US economy has experienced over the past 120 years.

The DJIA has effectively tripled its value since the low it reached in March 2009 following the impact of the global financial crisis. The persistent increases over the past eight years shows that, while the final sprint to the milestone was driven by enthusiasm over a Trump-led America, much of the credit lies in the continual improvement of the economy under former President Barack Obama – the US has added jobs for a record 75 straight months and the unemployment rate is sitting near a 10-year low.

That said, the momentum behind the index has increased in the last two months with financial stocks among the biggest winners as investors bet on higher interest rates and less regulation under Trump. Goldman Sachs, the largest constituent in the DJIA with a current weight just above 8%, is up nearly 30% since the election. JPMorgan Chase and American Express are up 17.4% and 14.6% respectively over the same period – they represent 2.9% and 2.7% of the index.

Following this momentum, investors have poured money into ETFs tracking the index with the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) seeing inflows of over $1.5bn since the election. The ETF holds over $16.3bn in assets under management (AUM) as of 26 January 2017 and has a total expense ratio (TER) of 0.17%.

The Shiller CAPE ratio, one of the most widely-used measures of valuation for the US stock market, currently stands at 28.5, its highest level for 15 years. However, it’s worth noting that it has been as low as 4.8 (December 1920), and as high as 44.2 (December 1999). Indeed, with a current price-to-earnings of 19.2, many analysts believe the index may continue to trend higher.

“Stock indices in the US and UK may well be at or near record highs, however when the earnings generated by companies in these markets are factored in, stock valuations show neither the extreme pessimism of 2008, nor the irrational exuberance of 1999,” said Khalaf. “This means they are trading somewhere in the middle of their range, so are neither exceptionally cheap nor hideously expensive. In the short term the stock market could move in either direction, but for long term investors it still makes sense to keep a healthy slug of their portfolio in equities.”

Other Dow ETFs listed in the US include the iShares Dow Jones US ETF (NYSE: IYY), which holds just over $1.0bn in AUM and has a TER of 0.20%, and the ProShares Ultra Dow30 ETF (NYSE: DDM), which provides twice the daily performance of the DJIA. Its TER is 0.95%.

In Europe, investors may gain access to ETFs tracking the DJIA from funds provided by iShares or Lyxor.

The iShares Dow Jones Industrial Average UCITS ETF (LON: CIND) has $350m in AUM and a TER of 0.33%. The Lyxor Dow Jones Industrial Average UCITS ETF (LON: DJEU) has AUM of $220m and a TER of 0.50%.

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