5 Reasons to Invest in a Dow ETF

There are many reasons to invest in a Dow ETF, ranging from stability and liquidity to long-term stock exposure. The following reasons will help you to evaluate if an investment in an ETF that tracks the Dow Jones Industrial Average is an appropriate addition to your portfolio. The oldest and best known Dow ETF, called the Diamonds Trust (which trades under the ticker "DIA") will be our focus.

DIA Has an Established Investment History

When you are considering including a security in your portfolio, the length and stability of the security is an important concern. DIA is one of the oldest ETFs, with a long-standing track record. The existence of this history will allow you to perform a thorough analysis on the security. Furthermore, because the history is long enough, you can feel confident that DIA will remain steady for years to come.

The Dow Jones Industrial Average (DJIA) is an Important Benchmark

Probably the most widely tracked and reported of the major U.S. stock indices, the DJIA has provided investors with a barometer of broad market performance for decades. It is a standard by which many professionals manage money, using it as a benchmark. This means that it remains a well-researched and highly analyzed index. Because it is constituted by only 30 stocks, you will be able to remain abreast of both developments within the index, and those that affect its members. This will allow you to maintain a well researched and understood investment.

DIA is a Good Asset Allocation Tool

Most professional money managers who follow modern portfolio theory believe that an investment portfolio should be diversified across asset classes. This diversification will, in most cases, include an allocation to U.S. equities. Because DIA represents an investment in a broad market stock index, a general allocation to stocks can be achieved if you buy DIA. Rather than needing to regularly buy and sell individual stocks, investing in DIA can satisfy your equity allocation for the long-term.

ETFs Receive Favorable Tax Treatment

Prior to the introduction of ETFs, most retail investors seeking a diversified investment in stocks would look to an indexed mutual fund. Mutual funds must mark their assets to market on an annual basis, which creates a short-term gain or loss. If you own an ETF instead, holding it for longer than a year, any gains are treated as capital gains and taxed at a far lower amount. Over the course of the investment, this difference can become significant.

ETFs Charge Lower Fees

Another advantage of ETFs over mutual funds is that their fees tend to be lower. Many mutual funds charge an upfront or back-end fee, called “a load.” Even funds that do not charge a load tend to be more expensive than an ETF. In addition, ETFs have the advantage over individual stocks that, because of reduced trading frequency, the commissions paid should be lower. Over the course of the investment, the net cost of ownership you will pay is lower with a Dow ETF. This savings can amount to a significant amount over time.

blog comments powered by Disqus
Scottrade