The S&P ETF vs The Dow ETF

If you are considering investing in either the Dow exchange-traded-fund (ETF) or the S&P ETF, there are some important factors to consider. While they have a few similarities, there are key differences which may impact your decision between the two. In either case, as the ETF market continues to experiences explosive growth, these are two of the oldest and most important ETFs available today.

The Dow ETF

The Dow ETF is officially called the Diamonds Trust, trades under the ticker “DIA,” and tracks the performance of the Dow Jones Industrial Average (the DJIA). Shares are informally referred to as diamonds. The DJIA is an index of 30 industrial stocks that attempt to represent the overall stock market based on the concept that these 30 stocks lead the economy.

The S&P ETF

The S&P ETF is officially called S&P Depository Receipts, trades under the ticker “SPY,” and tracks the performance of the S&P 500. Shares are informally referred to as spiders. The index is made up of 500 of the largest companies that trade on U.S. stock exchanges and is designed to represent the performance of the overall stock market as well.

Common Elements

Both spiders and diamonds are highly liquid instruments that given you exposure to the broad market (SPYs trade over 166 million shares per day while DIA trades over 10 million shares per day). Unlike mutual funds, ETFs can be traded at any point during the trading session and have favorable tax treatment from one year to the next. You have to use a marked-to-market price for tax purposes with mutual funds, where ETFs maintain their cost basis until they are sold. This means that you may see a tax savings if you hold an ETF over several years (paying capital gains taxes instead of having profits treated as ordinary income).

Advantages

While most retail investors and laymen follow the Dow, professional traders tend to track the S&P 500. This is driven partially by the highly liquid futures market behind the S&P and partially by its more diverse nature. Where the Dow is a price weighted average, the S&P is market cap weighted. The influence of a given company on the index is the result of the size of that company, not the price of its stock; it is generally considered a more accurate index. As neither ETF had any liquidity issues, you will see no major downside from one to the other.

For the less sophisticated investor, or for those who wish to spend less time tracking their portfolio, you will have an easier time understanding the movement of DIA. Backed by only 30 stocks, you will be more readily able to explain the movements of DIA. Often times, despite large moves in one direction of large stocks, SPY will go the other direction. This happens because the larger index follows the crowd more than any individual constituents. If you want to mirror the broad market over the long-run, SPY is a great choice. If you are more likely to want to understand the daily movements of your investment, DIA may be more appropriate.

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