This article is to educate investors about dividend paying ETFs that track the Dow Jones Industrial Average. The “Dow” comprises of 30 blue chip dividend paying stocks that span across an array of industries and sectors.
Just like there are ETFs that own all stocks in the S&P 500, we will review ETFs that own all 30 stocks in the Dow Jones and examine their long term performance.
Buying all 30 individual stocks in the Dow can get very expensive, and time consuming to manage. What if you could buy 1 ETF that contains all 30 of the stocks, for a low management expense ratio?
Well now you can. In this article, we explain five dividend paying ETFs that mimic the performance of the Dow Jones Industrial Average.
Let’s get started!
Table of Contents
This piece is broken down in to sections, feel free to jump to the area that interests you.
- SPDR Dow Jones Industrials ETF (DIA)
- Invesco Dow Jones Industrial Dividend ETF (DJD)
- iShares Dow Jones US ETF (IYY)
- ProShares Ultra Dow30 (DDM) ETF
- BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (ZWA)
i) SPDR Dow Jones Industrial Average ETF (DIA)
This is the largest dividend paying ETF that resembles the performance of the Dow Jones with $21.5 billion in managed assets and 0.17% expense ratio. In the last 5 years, DIA has returned 12.11% annualized average while the Dow Jones Index has made an annualized average return of 12.28%.
The 17 basis points in difference in performance is due to the expenses of managing this fund. This ETF has been in existence since January 14th, 1998 and managed by State Street Global Advisors; the investment management subsidiary of State Street Corporation.
The ETF yields a dividend of 2.14% with a price to earnings ratio of 18 while trading at a price to book ratio of 3.13. As a comparison, the S&P 500 is trading at a forward price to earnings ratio of 16.6.
The best thing we like about this ETF is that it tracks the returns of the Dow Jones pretty consistently over time. Below is the fund’s returns over the last 3, 5 and 10 years. For the past 3 years, the net asset value gained 16.25% annualized average while the Dow Jones index gained 16.44%. The difference of 19 basis points is the expense ratio.
ii) Invesco Dow Jones Industrial Average Dividend ETF (DJD)
If you are looking for a slightly higher dividend yield of 2.75%, look to the Invesco Dow Jones Industrial Average Dividend ETF with ticker DJD. This ETF uses an alternative approach by weighing each holding in the Dow Jones via dividend yield, versus price.
Therefore, the higher the dividend yield of the underlying security, the higher the weighting included in this ETF. As such, stocks like Dow Inc, Exxon Mobil, IBM, Verizon, Pfizer, Chevron, Walgreens, 3M, Caterpillar and JP Morgan Chase make up over 50% of this ETF due to their higher dividend yields.
DJD is a newer ETF with an inception date of December 16th, 2015 and only has $83 million in assets under management. It has a lower expense ratio of 0.07%. Below we have attached a performance screenshot. Since last 3 years, the DJD ETF has gained 14.22% net of expenses while the Dow Jones Industrial Average Index has gained 16.44%, hence a 2.22% under performance.
This ETF is managed by Invesco, an independent investment firm that has over $1,184 billion in assets under management as of September 2019. The company operates in over 25 countries and has over 8000 employees.
3) iShares Dow Jones US ETF (IYY)
This ETF does not track the Dow Jones Industrial Average directly. However, it provides access to greater than 90% of the US stock market by holding 1,180 stocks spread across all sectors of the US economy. The ETF has over $1.2 billion in assets under management with an expense ratio of 0.2%.
The ETF has a price to earnings ratio of 21.14 while the underlying companies trade at 3.2 times price to book ratio. The ETF has a dividend yield of 1.65%, which is lower than DIA at 2.14% while DJD yields 2.75%.
Since this ETF holds 1,180 stocks versus the Dow Jones Industrial Average that holds only 30 stocks, it is useful to compare the performance of this ETF versus the Dow Jones over a 5 and 10 year period. Below are the annualized average returns of this ETF. Over the last 5 years, IYY has annualized average return of 10.33% while the Dow has gained 12.11%. This is a significant out performance of 1.78%.
Over the last 10 years, IYY has annualized average return of 12.93% while the Dow Jones has returned 13.35%, again an out performance of 42 basis points.
When looking at the individual sectors of IYY, the only thing different is less exposure to Industrial stocks. While the Dow Jones Industrial Average has 20% of its stocks in the Industrial sector, the IYY ETF has only 9.68% exposure. The exposure to financials and information technology stocks for both the IYY and the Dow Jones is quite similar, save for 1-2% difference.
iv) ProShares Ultra Dow30 (DDM) ETF
The ProShares Ultra Dow 30 ETF is a leveraged instrument that aims to replicate twice the daily performance of the Dow Jones Industrial Average for a single day. Since this is a leveraged ETF, investors should only use these as trading vehicles for time periods not more than a single day. However, if investors are bullish on the trajectory of the US economy, this ETF will generally double the return of the Dow Jones Industrial Average over a period of time.
Founded in June 19th, 2006, DDM has $357 million in assets under management with an expense ratio of 0.95%. We believe this is too expensive, in fact almost 5 and 1/2 times higher than the expense ratio of SPDR Dow Jones Industrial Average ETF (DIA).
The fact sheet compares its performance with that of the Dow Jones Industrial Average. Over a 5 year period, the Dow Jones returned annualized average gains of 12.28%. The ProShares Ultra Dow 30 should typically double this performance. However a 5 year period shows average annual gains of 20.75%.
The discrepancy of 20.75% – (12.28 times 2 = 24.56%) = 3.8% is due to the daily rebalancing of the portfolio which leads to ETF decay, as well as the high annual expense ratio. The high operating costs of 0.95% of this fund is to be expected due to the higher trading volume and management costs.
ProShares is a global leader that provides access to leveraged and inverse tracking ETFs with almost $32 billion in assets under management. They are an affiliate of ProFunds that was founded in 1997 and provides access to innovative mutual funds that track specific indices such as the Dow Jones Financial Index, Dow Jones US Health Care Index, Industrials, Internet, Oil and Gas Index, etc.
v) BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (ZWA)
For our Canadian readers who would like to invest in Canadian dollars, the BMO Covered Call Dow Jones ETF (ZWA) is a good option since it provides exposure to all Dow Jones 30 companies while earning call option premiums.
The portfolio managers at Bank of Montreal (BMO) write out of the money call options which are selected based on their implied volatility. The option premiums earned provide a good downside protection in bear markets, where any drops in the value of the underlying companies are reduced by the premiums earned on call options.
BMO Covered Call Dow Jones Industrial ETF has $238.5 million in assets under management and has a management expense ratio of 0.75%. The dividends are paid monthly and ETF currently yields 4.7% in annualized dividend while the underlying Dow Jones Industrial Average yields 2.14%.
In terms of performance, the ZWA has returned 55% over a period of 5 years, concluding an annualized average gain of 11%. This is slightly underperforming the Dow Jones Index which has returned 12.28% over the same period. However, investing in an ETF costs money and this fund has a 0.75% expense ratio, as well as is subject to Canadian versus US dollar volatility.