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Dow Hits Record High: Will ETFs Rally Further?

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After underperforming the Nasdaq and the S&P 500 for most of 2020, the Dow Jones has bounced back this year and hit a record high on Mar 10 as inflation and rising rate fears have ebbed a bit. The annual inflation rate in the United States increased to 1.7% in February from 1.4% in January, in line with market forecast.

Also, the House passed the $1.9 trillion American Rescue Plan after the Senate passed a slightly augmented version late last week. Overall,SPDR Dow Jones Industrial Average ETF (DIA - Free Report) is up 5.6% this year, followed by 3.2% gains in the S&P 500 and 1.4% advancement in the Nasdaq Composite. Against this backdrop, investors must be mulling over if the Dow Jones and the related ETFs can rally further. Let’s delve a little deeper.

Uptick in Manufacturing Activity: A Plus for Dow Jones?

Manufacturing numbers point to a recovery in the United States. An uptick in manufacturing numbers can act as a strong tailwind to Dow Jones Industrial Average’s forward growth, in our opinion.

The Institute for Supply Management’s (ISM) index of national factory activity rose to a reading of 60.8 last month (the highest since February 2018) from 58.7 in January. The data also beat economists’ estimate of 58.8.

New orders (64.8 versus 61.1), production (63.2 versus 60.7), employment (54.4 versus 52.6) and new export orders (57.2 versus 54.9) pulled off this beat. Investors should note that a reading above 50 indicates expansion in manufacturing, which makes up about 11.3% of the U.S. economy.

Manufacturing numbers have been volatile in recent months. The February rebound thus came as a relief. Of the 18 manufacturing industries, 16 registered growth last month. Industrials sector takes about 17.60% of the fund DIA. President Biden's push for more infrastructure activities should augur well for the sector. 

Compelling Valuation

Since the start of fourth-quarter 2020, Wall Street has been on an uptrend on vaccine hopes. But Dow Jones lagged its S&P 500 and Nasdaq counterparts last year. This makes its valuation cheaper. DIA has a P/E of 23.05X currently versus the S&P 500’s 25.16X and the Nasdaq-100’s Invesco QQQ’s (QQQ - Free Report) 35.32X. So, many investors may be interested to dig into the weaker valuation going further into 2021.

Declining Reliance on Boeing  

A few years back, Boeing — which has been struggling for quite some time due to its own operational issues and the coronavirus-led air travel massacre — used to take 10% of the fund DIA. So, the company’s performance used to matter a lot. But today, Boeing takes about 4.77% of the fund DIA, meaning that the Dow Jones rally is no more dependent on Boeing’s fate. Rather, its top holdings are now UnitedHealth Group, Goldman Sachs (a rising rate beneficiary currently) and Home Depot (a prospective gainer in economic revival).

Oil Rally

Furthermore, it has been noticed lately that Dow Jones shares a deep relationship with the oil price movement. Though the energy sector rally has spread optimism in the broader market as a whole, in most cases, on a particular day of oil surge, the spurt in the Dow Jones is steeper than that of the S&P 500, or vice versa (read: Sector ETFs to Benefit/Lose as Oil May Hit $70 Soon).

Oil prices made a comeback recently, buoyed by the maintenance of the OPEC output cut and economic improvement globally. Vaccine and U.S. fiscal stimulus optimism have also led to the rally. 

United States Oil Fund LP (USO - Free Report)  added about 32.5% while United States Brent Oil Fund LP (BNO - Free Report) has advanced about 33.9% this year (as of Mar 10, 2021).

ETFs in Focus

The above factors point to strength in the Dow Jones in the coming days. Though we are not sure how long the rally will continue, investors intending a momentum play, can bet on DIA, Guggenheim Dow Jones Industrial Average Dividend ETF (DJD - Free Report) and iShares Dow Jones US ETF (IYY - Free Report) .

Investors can also settle for leveraged Dow ETF plays as long as the trend favors them. Here, ProShares Ultra Dow30 (DDM - Free Report) and ProShares UltraPro Dow30 (UDOW - Free Report) are a couple of choices.

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