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This New ETF Fixes the Biggest Problem with the Dow Index

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  • (0:40) - Trends in Newly Launched ETFs
  • (2:20) - What Is The Dow Jones Industrial Average (DJIA)?
  • (6:10) - First Trust Dow 30 Equal Weight ETF: EDOW
  • (8:05) - The Bottom Line:

Over 150 new funds have launched in the first three quarters of 2017, but which is the best?

Sure, there have been plenty of novel products that have come out to give investors exposure to fresh market areas, while there has been great progress on the cost front as well. However, in today’s podcast, I discuss what I think is the best idea of the group, and one that has been long overdue as well.

The ETF I take a look at in greater detail is the First Trust Dow 30 Equal Weight ETF (EDOW - Free Report) . This is by no means the ‘sexiest’ fund to launch this year, but it is important nonetheless. You can begin to understand why this is the case by taking a closer look at the index it is based off of, the Dow Jones Industrial Average, and the issues that are present in that popular benchmark.

Dow in Focus

In the podcast, I discuss a bit about the history of the Dow, and the most important thing about the index that some investors still don’t know. That is, of course, its price weighting.

Price weighting is a method where the stock’s price per share is used to weight securities, as opposed to market cap or any actual indicator of a company’s size. While this might not have mattered too much when the Dow was first created and the benchmark traded in the double digits, the modern world (with the Dow over 22,000) has produced some wide variations in various component stock prices.

For example, Boeing (BA - Free Report) at close to $250 a share is one of the top components, and that is juxtaposed with General Electric (GE - Free Report) which is at just $25/share. But while GE is actually a much larger company than Boeing (by market cap), the aerospace giant receives a considerably larger allocation in the Dow Jones Industrial Average and ETFs tracking the benchmark such as the SPDR Dow Jones Industrial Average ETF (DIA - Free Report) .

That is why gigantic companies like Apple (AAPL), Microsoft (MSFT), and Exxon Mobil (XOM)—the three biggest companies by market cap in the index—make up half the allocation that Boeing, Goldman Sachs (GS - Free Report) , and 3M (MMM - Free Report) combined do!

And despite holding just 30 stocks in total, the price-weighted average puts just 15% of its assets into the bottom 10 components. This includes less than 1% for GE, the company that has survived on the Dow for the longest, and with a market cap over $200 billion.

A Better Way?

Does that make sense as a way to track the U.S. market? Of course not. Stock prices are more-or-less arbitrary and the Dow is a relic of a different time in American finance.

That is where EDOW comes in. The fund takes the same 30 stocks that we see in the ‘regular’ Dow, it just weights them equally. So, the bottom 10 companies actually receive about one-third of the exposure (unlike the 15% they get in DIA), while no company gets more than 4% of the assets. So, each quarter, GE and BA will have the same weight, regardless of what happens to their share price. Meanwhile, companies like 3M and Goldman will see their weights roughly halved in EDOW when compared to DIA, while firms like Cisco, Pfizer, and Intel will see a sizable boost in their representation.

Now, this shift produces some other interesting trends, but check out the podcast for additional information on how EDOW is different from its DIA cousin, and what the impact is on key items like cost, average market cap, and dividend yield too.

In the end though, I hope you’ll agree that this equal weight technique makes a whole lot more sense than price weighting. It gives you broad exposure across the U.S. economy to 30 blue chip stocks in an equal fashion, ensuring that the success or failure of one company doesn’t dominate.

Isn’t part of the point of the Dow in the first place to represent the American economy and not a single company or two? The Dow Jones Index is an average after all, so why not average things out and give all the components the same exposure? It might not be a perfect way of doing it, but it sure makes a whole lot more sense than just going by price per share!

More than anything though, I am absolutely shocked it took so long to see this product come to market, but check out the podcast for an even closer look at this new fund, and the Dow Jones Industrial Average as well!

Bottom Line

But what do you think about EDOW and the Dow Jones Industrial Average? Do you agree that the Dow is outdated? Make sure to write us in at podcast @ or find me on Twitter @EricDutram to give us your thoughts on this, or anything else in the fund market.

But for more news and discussion regarding the world of investing, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!

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