The Dow Jones Industrial Average ETF (NYSEARCA: DIA), the Vanguard S&P 500 Index (NYSEARCA: VOO), and the Invesco QQQ Trust (NASDAQ: QQQ) are indexes that track the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq respectively. As we delve into the three of the most-followed indexes in the U.S, we ask: Are they a buy?
What are the benefits of investing in ETFs like these?
ETFs are made up of various companies, and depending on the ETF, the number and weighting of the companies in it will vary. They give broad exposure to several stocks and are suited to those who want to reduce volatility. ETFs can also allow you to own a diversified portfolio with only a small amount of capital and can be a suitable anchor for any investors portfolio. However, ETFs are less likely than growth stocks to produce market-crushing returns.
Dow Jones Industrial Average ETF
This DJIA comprises 30 “blue chip stocks” and is over 100 years old, making it the U.S oldest U.S markets’ oldest barometer. The ETF is designed to mimic the DJIA’s price and yield performance, also known as “the dow.” Due to the nature of the companies in this and large market caps, the ETF is low risk, with many household names such as Johnson & Johnson (NYSE: JNJ) and Visa Inc (NYSE: V).
The fund is weighted to conform with the DJIA and is therefore price-weighted and picked by the managing editor of The Wall Street Journal and the head of both the Dow Jones Indexes research and CME Group research. Hence this selection of stocks is viewed by some as somewhat arbitrary. Apple (NASDAQ: AAPL) is the largest holding in the ETF at roughly 9.69%, and UnitedHealth Group Inc (NYSE: UNH) is the second-largest holding at 7.84%. A bonus to owning this ETF is the monthly dividend yield of 2.25%.
This ETF has performed well over the last five years, considering the companies’ size returning roughly 69%. However, over the previous year, it is more or less flat.
Vanguard S&P 500 Index
The Vanguard S&P 500 Index tracks the 500 largest companies in the U.S, so investing in this index is a bet on America. The S&P 500 has historically returned an average of 10% per year, and the index aims to match this. Famed investor Warren Buffet said at his 2016 Berkshire Hathaway (NYSE: BRK.A) (NYSE:BRK.B) annual meeting, “My regular recommendation has been a low-cost S&P 500 index fund”.
Technology is the most represented sector in the ETF. Microsoft (NASDAQ: MSFT) is the top holding, followed closely by Apple, while the rest is made up of large or mid-cap stocks. This ETF has a median market cap of $137.2 billion, and it also pays a dividend yield of 1.88%.
This ETF has returned 7.9% in the last year, and 53% over the previous five years, demonstrating its effectiveness at matching the average returns of the S&P 500. Historically, by investing in an index fund tracking the S&P 500, the chance of losing money after 25 years has been 0%.
Invesco QQQ Trust
The Invesco QQQ Trust index fund aims to mirror the performance of the Nasdaq 100, which is mostly technology orientated and excludes financial companies. The Nasdaq 100 is where all the FAANG stocks are listed and therefore gives investors in the index fund greater exposure to the tech sector.
Its weighting may be viewed as a risk with the top 3 holdings accounting for over 30%. Apple is the largest holding at 12%, followed by Microsoft and Amazon; however, this will have helped to drive gains in recent times. The trusts’ weightings are reviewed quarterly and The Trust has returned roughly 17.8% in the last ten years, with the majority of those gains in recent years. This means that it has lagged the market over that time period.
Depending on what you are looking for, any of these ETFs could be suited to you. If you want more exposure to big tech, the Invesco QQQ Trust could be the better option. However, the Vanguard S&P 500 index has proven to be a suitable option for the long-term, giving investors extra diversification amid historic uncertainty.
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