Credit: Shutterstock photoA pple's entry into the Dow Jones Industrial Average last week was a big deal -- for Apple perhaps.And for ETF investors? Not so much, says Alex Bryan, an analyst at Morningstar Manager Research. "The change makes sense in terms of meeting the index's objective of providing exposure to industry leaders," Bryan said. However, "more than 95% of the index stayed the same as it was before."
Apple ( AAPL ), the California-based computer and iPhone maker, now accounts for 4.68% of the index. It's no doubt pleased to make the cut for this prestigious benchmark of 30 blue-chip stocks, often simply called the Dow.
SPDR Dow Jones Industrial Average ( DIA ) tracks the Dow. The $12.7 billion exchange traded fund has lagged behind the performance of other big-name, large-cap ETFs such as SPDR S&P 500 ( SPY ) andPowerShares QQQ ( QQQ ) in recent years.
But it has outperformed over longer periods of time.
DIA averaged an annual 5.6% stock market gain in the last 15 years. SPY grew by an average annual 4% over that period. QQQ fell 0.02%.
With Apple's inclusion, Philip Blancato, CEO of Ladenburg Thalmann Asset Management, is more inclined to buy the ETF.
"From a sector and holding perspective, DIA will now have less tracking error than its peers," Blancato said. QQQ gives 14.43% weighting to Apple; SPY assigns 3.96%. Apple is the top holding in both.
Blancato has avoided investing in DIA so far, mainly because of its highly concentrated portfolio.
"I still believe in a more diversified approach to getting exposure to the U.S. large-cap market," he said. He favors iShares Russell 1000Value ( IWD ) for its wider range of sectors and securities.
Market-Leading Mega Caps
Apple's entry was made possible in part byVisa 's (V) 4:1 stock split on March 19. The electronic payment firm's post-split adjusted lower price would have reduced the tech sector's weighting in the Dow. Adding Apple partially offset that.
Apple's own 7:1 stock split in June also helped. Its high pre-split price would have skewed the Dow's reflection of the U.S. market.
As Apple debuted on the index, telecom giantAT&T (T) bowed out; Visa's weighting was cut; and investment bankGoldman Sachs (GS) took the top spot.
Besides Goldman Sachs and Apple, DIA's top five holdings include3M (MMM),IBM (IBM) andBoeing (BA).
Price-Weighted Index
Although one of the most quoted stock indexes, the Dow is seen by some as outdated.
In part, that's because of its price-weighted indexing methodology -- stocks with a higher price get more weight and have a bigger role in how the index performs.
That indexing style, and selection of securities by committee, also means DIA offers far less predictable returns than cap-weighted, rules-based indexes, Blancato said.
Bryan views price weighting as "a relic from the 1800s" when index creators lacked the computing power to do much else. It's a simple approach, but one that he says lacks a sound economic basis.
"What I do like about the index," Bryan added, "is the focus on industry leaders with sustainable, competitive advantages." The mega-cap holdings are likely to "generate attractive profits for long periods of time" for investors seeking stock market gains .
DIA's 0.17% expense ratio is more than SPY's but less than QQQ's. Those peers are weighted by market cap. ProShares also offers geared ETFs following the Dow.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
