The Dow is the average of the value of one share each of 30 of the largest companies in the United States, writes Trent for The Simple Dollar.

The Dow Jones & Company uses a scaled average, in which they keep track of past splits and multiply the values of each share. In this way, the Dow average is maintained despite any changes to market value of company shares – the most common change being share splits. Trent summarizes the Dow as a “quick summary of the current value of shares of 30 large companies.”

The value of shares depends on supply and demand. However, information about the economy or a specific company also play a key role in causing shifts to supply and demand.

Investors tend to buy/sell depending on future expectations. Therefore, the value of the Dow often decreases before poor economic news, such as the unemployment rate. The value of the Dow often increases before auspicious economic news. If there are any signs that the economy is slowing or accelerating even a bit, the Dow will fall or rise, respectively. (Grim unemployment numbers).

Trent urges investors to only “look at the the Dow as a predictor,” in that the Dow may predict the general direction an economy is leaning toward. (Dow hits yearly high).

For more information on the Dow, visit our Dow Jones Industrial Average category.

• DIAMONDS Trust, Series 1 (NYSEArca: DIA): software 2.0%, industrial materials 22.6%, energy 11.1%, hardware 16.3%, media 2.1%, telecommunications 4.5%, healthcare 8.7%, consumer services 16.7%, financial services 11.6%, consumer goods 10.4%

• iShares Dow Jones U.S. Index (NYSEArca: IYY): software 4.6%, industrial materials 11.1%, energy 11.3%, utilities 3.8%, hardware 9.8%, media 2.6%, telecommunications 5.8%, healthcare 12.2%, consumer services 8.6%, business services 4.3%, financial services 15.6%, consumer goods 10.1%

Max Chen contributed to this article.

Short-term incentives and measures to stoke the economy are not fixing the real problem of sustained growth as businesses reduce payrolls, bank lending contracts, and consumers save more and spend less, comments Steven Pearlstein for The Washington Post.

The Federal Reserve took bold and necessary steps to prevent the collapse of the financial system. But the Fed also created so much liquidity that some fear that another financial bubble is forming.

As the money flew off the printers, the Fed was cutting interest rates in inter-bank lending to basically zero. However, banks kept interest rates unchanged for everyone else, and the result is that “spreads” between bank-to-bank lending and lending to everyone else are close to record highs.

The entities that are actually borrowing are hedge funds and other investors who use the money to purchase stocks, corporate bonds and commodities, pushing prices higher. Some ETFs to watch for activity include:

• DIAMONDS Trust, Series 1 (NYSEArca: DIA): up 14.0% year-to-date
• PowerShares QQQ (NasdaqGM: QQQQ): up 43.3% year-to-date
• SPDRs S&P 500 (NYSEArca: SPY): up 19.1% year-to-date
• iShares iBoxx $ Invest Grade Corp Bond (NYSEArca: LQD): up 8.9% year-to-date
• iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG): up 4.9% year-to-date

The excess liquidity is also being used to finance new “carry trade,” borrowing at low U.S. rates to buy bonds in places with higher rates.

• POWERSHARES DB G10 (NYSEArca: DBV): up 17.7% year-to-date

The Central Bank is determined to stay its course, using anything that will strengthen the balance sheets. Fed officials won’t be increasing interest rates and reducing liquidity until they decide the economic recovery has a proper foothold.

For full disclosure, Tom Lydon’s clients own shares of LQD and QQQQ.

Max Chen contributed to this article.

It’s important to keep a few tidbits in mind when picking out a stock, according to InvestingFirstSteps.

Beat the market? A lot of investors are too focused on “hot tips” or phenomenal returns in certain stocks. It should be noted that even professional traders who are paid to track the stock markets rarely provide returns of 11% or more, on average. We follow a 200-day moving average to help guide us. You can read more about this strategy in The ETF Trend Following Playbook.

ETFs. ETFs are popular and easy to use. They’re transparent, meaning you know what’s in them at all times. They trade all day on an exchange, just like a stock. And, on average, they’re cheaper than mutual funds. ETFs seek to reflect returns on the underlying index such as the S&P 500, Dow Jones Industrials Average and NASDAQ Composite. The ETFs listed below are based on a major indexes in the United States – from this point, you can access commodities, currencies, specific sectors and much, much more.

• SPDRs S&P 500 (NYSEArca: SPY)
  

• Diamonds Trust (NYSEArca: DIA)
  

• PowerShares QQQ (NasdaqGM: QQQQ)
  

For more information on investing, visit our ETF 101 category.

Max Chen contributed to this article.

Dow Jones & Co. is reported to be entertaining potential buyers for its stock-market index business, report Dennis K. Berman and Jeffrey McCracken for The New York Times. The move could ultimately result in the sale of the Dow Jones Industrial Average.

The process is far from over, though. It’s being conducted by Goldman Sachs, and could lead to a joint venture or other combination. The whole process may also end without any sale.

One possible contender is MSCI Inc., which specializes in creating market indexes.

According to Deal.com, News Corp.’s Dow Jones Index business may be worth between $600 million and $650 million.  Dow Jones began licensing its DJIA and other indexes in 1997, has more than 130,000 indexes and sells or licenses the data associated with the financial gauges.

Some competitors of Dow Jones include MSCI, Standard & Poor’s, the FTSE Group and New York Indexing.

The Dow Jones Industrial Average, started by Charles Dow in 1896, is one of the world’s best-known stock indexes. The Diamonds Trust (DIA), up 9.2% year-to-date, tracks the index.

For more stories on indexing, visit our education category.

Kevin Grewal contributed to this article.

ETF trading volume jumped from $142 billion in 2004 to $3 trillion in 2008, and settling around $1.4 trillion in June 2009, write Yan Zilbering and Donald Bennyhoff for IndexUniverse. Since 2008, nost of the ETF trading volume has been centered around a narrow selection of ETFs from the 850 or so available as of June 2009.

The top 20 most heavily traded ETFs by dollar volume amount to around 80% of total ETF trades. At the forefront are the most established ETFs with the most assets that are popular among investors of all types. The included ETFs account for about 50% of all ETF trading volume and they track the most common, broad-based domestic indexes:

• SPDRs S&P 500 (SPY): avg. daily turnover since Jan. 2008 is 43%
• PowerShares QQQ (QQQQ): avg. daily turnover since Jan. 2008 is 43%
• iShares Russell 2000 Index (IWM): avg. daily turnover since Jan. 2008 is 54%
• DIAMONDS Trust, Series 1 (DIA): avg. daily turnover since Jan. 2008 is 28%

There are also a group of nine narrowly focused sector and sub-sector ETFs, which represent around 16% of ETF trades, used to implement various strategies through the easy access of specific areas of the market.

• Financial Select Sector SPDR (XLF): avg. daily turnover since Jan. 2008 is 45%
• Energy Select Sector SPDR (XLE): avg. daily turnover since Jan. 2008 is 40%
• Oil Services HOLDRs (OIH): avg. daily turnover since Jan. 2008 is 54%
• SPDR Gold Shares (GLD): avg. daily turnover since Jan. 2008 is 6%
• iShares Dow Jones US Real Estate (IYR): avg. daily turnover since Jan. 2008 is 58%
• iShares MSCI EAFE Index (EFA): avg. daily turnover since Jan. 2008 is 4%
• iShares MSCI Emerging Markets Index (EEM): avg. daily turnover since Jan. 2008 is 12%
• iShares FTSE/Xinhua China 25 Index (FXI): avg. daily turnover since Jan. 2008 is 20%
• iShares MSCI Brazil Index (EWZ): avg. daily turnover since Jan. 2008 is 18%

The last set includes seven leveraged ETFs, which produce the multiple or inverse returns of the broad market or sector. This group is usually used for capitalizing on the short-term movements in the markets.

• Ultra S&P500 ProShares (SSO): avg. daily turnover since Jan. 2008 is 61%
• UltraShort S&P500 ProShares (SDS): avg. daily turnover since Jan. 2008 is 109%
• Ultra QQQ ProShares (QLD): avg. daily turnover since Jan. 2008 is 90%
• UltraShort QQQ ProShares (QID): avg. daily turnover since Jan. 2008 is 178%
• UltraShort Financials ProShares (SKF): avg. daily turnover since Jan. 2008 is 242%
• Direxion Daily Financial Bull 3X Shares (FAS): avg. daily turnover since Jan. 2008 is 128%
• Direxion Daily Financial Bear 3X Shares (FAZ): avg. daily turnover since Jan. 2008 is 241%

By looking at the data, it is noticeable that the more heavily traded ETFs traded at a higher turnover rate. ETFs tracking volatile sectors have been traded at even higher levels.

Max Chen contributed to this article.

Ron Rowland for JutiaGroup lists these six ETFs that you must get to know. Rowland’s caveat is that he isn’t saying buy them right now. But know them. They’re among the largest and most liquid ones on the market today:

• SPDR S&P 500 (SPY): up 12.6% year-to-date; gives instant access to the S&P 500, an index of the 500 largest domestic stocks covering all industry sectors. This ETF was the first ETF, introduced in 1993, and is referred to as the “grandfather” of funds.

• PowerShares QQQ (QQQQ): up 34.8% year-to-date; viewed as a large-cap technology benchamark, this ETF tracks the Nasdaq 100 is a sub-set of the Composite, consisting of the 100 largest non-financial stocks in the index. Exposure to real estate, banks and insurance companies is not available in this fund.

• Diamonds Trust Series 1 (DIA): up 7.6% year-to-date; a 30-stock index that tracks Dow Jones Industrial Average, an index of the largest U.S. blue chip stocks. DIA excludes some key sectors like transportation and utilities. Despite criticisms of the Dow (it’s too narrow, it excludes certain key sectors), it does give access to mega-caps.

• iShares Russell 2000 Index (IWM): up 17% year-to-date; the Russell 2000 is an index of the 2,000 smallest companies ranked by U.S. market value. Small-caps often lead the way in a recovery, too. IWM can be a good way to hold hundreds of these small companies in one fund.

• iShares MSCI EAFE Index (EFA): up 15.2% year-to-date; An international fund based upon the Europe, Australasia and Far East Index published by Morgan Stanley Capital International. It includes Western Europe, Australia, Japan — the countries with modern stock markets and banking systems. The countries in the index can change as new ones are promoted to developed status.

• iShares MSCI Emerging Markets Index (EEM): up 45.7% year-to-date; markets like Brazil, Russia, India and China are represnted in this fund, along with markets that have recently made ties with the rest of the world. It can be challenging to buy stocks in emerging markets. This ETF, like so many others, simplifies the whole process.

If these or any other ETFs are appealing to you and right for your portfolio, watch the trend lines to spot any opportunities to get in. Be sure to have a sell point before you buy, too.

For more stories about ETFs, visit our ETF 101 category.

For full disclosure, Tom Lydon’s clients own shares of EEM, QQQQ and SPY.

The day has come that we can celebrate our freedom  with our friends and family, and drink a celebratory beer while watching the fireworks. But make sure your beer was made with pride in the beautiful United States.

A topic of much recent debate, “Buy American” sounds patriotic, but it entails risk. The globalization of  markets is also part of the concern, as many of the materials and products we use to “Buy American” are actually made in China.

As stated in an editorial from The New York Times, the Democrats in Congress could not resist adding a “Buy American” provision to the fiscal stimulus bill earlier this year. It might seem sensible to ensure that taxpayer dollars would be used exclusively to support American jobs. This is creating conflict with American allies, and this movement could cost the United States.

Foreign and domestic companies that employ hundreds of workers in this country cannot bid for government projects because they cannot guarantee the American roots of all the steel, iron and manufactured goods in their supply chain, as the provision requires. Are there alternatives made in America that can replace foreign counterparts?

On the flip side, a consistent effort to buy food products farmed inside the United States, for example, would not only cut down on the environmental costs of shipping food into the country, but also could nurture a much stronger local agricultural industry in the long-term, reports Winnipeg Free Press.

Well, even if your jeans do not have a “Made in the U.S.A.” tag, you can still continue your loyal patriotism in other ways. The battle will continue over “Buy American” and the goal is the same, to keep American growing and flourishing.

ETFs that hold U.S. companies:

• iShares US Total Market Fund (IYY): up 15.3% over three months

• iShares S&P 100 Index Fund (OEF): up 13.1% over three months

• DIAMONDS Trust Series 1 (DIA): up 10.5% over three months

Have a Happy and Safe 4th of July!!

Some of the dividend-focused ETFs are so diversified that they could stand in as core holdings for a portfolio, remarks Paul Justice for Morningstar. When considering a dividend paying stock or ETF, the objective is to think growth over the long-term. Dividend investing is all about finding solid dividend stocks that are reasonably priced and are expected to continue raising their dividends in the future, explains Dividends4Life on iStock Analyst.

Do not confuse dividend investing with searching for high-yielding stocks to generate a high income. A majority of the time, the quality ones will not have outrageous yields, however the growing dividends over time could compensate.

Here is a small sample of dividend-paying ETFs. Note that this is not all-inclusive, and there are may other worthy ETFs delivering dividends to choose from:

• Vanguard Financials (VFH): yields 5.9%; down 5.2% year-to-date
• PowerShares International Dividend Achievers (PID): yields 6.2%; up 3.4% year-to-date
• SPDR S&P Dividend ETF (SDY): yields 6.4%; down 1.1% year-to-date
• SPDRS (SPY): yields 3.3%; up 1.4% year-to-date
• WisdomTree LargeCap Dividend (DLN): yields 4.8%; down 4.5% year-to-date
• Industrial Select Sector SPDR (XLI): yields 4%; down 2.3% year-to-date
• Diamonds Trust, Series 1 (DIA): yields 3.9%; up 2.8% year-to-date
• iShares S&P 100 (OEF): yields 3.7%; down 0.9% year-to-date
• iShares NYSE 100 (NY): yields 3.8%; down 2.9% year-to-date
• Rydex Russell Top 50 (XLG): yields 3.6%; down 1.6% year-to-date

Both indexes generally move in tandem, with both either showing gains or losses.  However, the magnitude of these moves can differ substantially because of the composition and holdings of the indexes.

The Dow is price-weighted and only holds the top 30 U.S. companies, whereas the S&P 500 is market-cap weighted and holds 500 U.S. companies. As a result of this underlying characteristic, one of the two benchmarks will outperform the other depending on the time period, states Prestbo of MarketWatch.

History further supports this.  Over the last decade, the Dow has beaten the S&P 500 in seven times by an average of 4.5%.  If one picked a different 10-year span, the results could differ significantly.  When considering the most recent market collapse, the Dow fell from its peak a lot quicker than the S&P 500 did, the Dow lost 4.7% in the fourth quarter and the S&P 500 dropped 3.8%.

The reason for this aforementioned inequality is that the S&P 500 holds smaller than mega-cap stocks, unlike the Dow.  What’s alarming is that the bottom layer of market capitalization, which is about 20% of the S&P 500, accounted for 35% of the S&P 500’s loss.

Another reason could be the weighting of certain sectors.  For example, the decisive group in last years market collapse was Oil & Gas, which caused 4.6% of the S&P 500’s decline as compared to 1.4% for the Dow.  Why such a huge discrepancy one may ask?  The answer is fairly simple.  The Dow index holds only two Oil & Gas stocks, Chevron (CVX) and Exxon Mobil (XOM), whereas the S&P 500 hold these and an additional 33 energy stocks, all of which were affected by the drop in crude oil.

Another sector that was made its mark was technology, which chipped away 4% from the Dow as compared to 6.8% from the S&P 500.  The Dow holds four technology stocks as compared to 60 held by the S&P 500.  Teh opposite is also true.  When looking at industrials, the Dow holds five stocks which were all down and pushed the index down 9%.  As for the S&P 500, it holds these five stocks in addition to 73 others, of which nine were either in positive territory or neutral, enabling the sector to account for 5.2% of the index’s decline.

It is safe to say that identical moves by component stocks can produce different results in the two indexes, depending on how they are weighted and measured.  So which one should an investor follow?  It is dependent on the investor’s personal preference.  The Dow is more concentrated than the broad S&P 500, which could be either a good or bad thing.  As for both indexes, they offer industry diversification and good exposure to the overall markets.  When considering the S&P 500, keep in mind that its allocation to smaller stocks can overshadow the dominance of the big stocks and can act as headwinds or tailwinds to impede or enhance overall performance.

From an ETF perspective, the Diamonds Trust Series 1 (DIA), is a good inexpensive way to track the Dow. The ETF is down 10.3% year-to-date and has 30 holdings, all of which are large- and mega-cap, just like the Dow.

A cheap and efficient way to grab exposure to the S&P 500 is through the SPDR S&P 500 (SPY), which is down 7.5% year-to-date.

Remember to always have a strategy and do your homework before making your choice.

For full disclosure, some of Tom Lydon’s clients own shares of SPY.

Kevin Grewal contributed to this article.

Nearly every day, you’ll hear about the Dow being up or being down, but how many people know what the numbers actually mean?

The Dow is one of three major indexes in the United States. Combined, these indexes are all major indicators of the U.S. economy and its overall health. The other heavyweights are the S&P 500 and the NASDAQ Composite and along with the Dow, the group is referred to as the Security Market Indicator Series, explains Investopedia.

Of the three, the Dow is the most talked about and it is also the most easy to understand.

Here are some facts to help better understand the DJIA:

• History: Dow Jones & Co. was founded in 1882 by Charles Dow, Edward Jones and Charles Bergstresser. The focus was on growth stocks and transport companies. Then it became the transportation average, as nine railroad stocks, a steamship and communications company were all included. In 1896, the index diverged into two averages, creating the Dow Jones Transportation Average and the Dow Jones Industrials.
• Weighting Method: The Dow is price-weighted. A downside to this is that on top of having to deal with stock splits, it doesn’t reflect the fact that a $1 change for a $10 stock is much more significant percentage-wise than a $1 change in a $100 stock.
• Calculations: Originally, the benchmark that would project general market conditions and therefore help investors bewildered by fractional dollar changes. It was a revolutionary idea at the time, but its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by 11 - the number of stocks included in the index. Today, the DJIA is made up of 30 of the largest companies that lead the economy, chosen by the editors of The Wall Street Journal. Today, with stock splits, dividends dividing the Dow by 30 does not hold. The Dow Divisor was thus implemented, and it’s constantly being modified.
• Dollar Value: To figure out the dollar value of a DJIA number, Investopedia says to divide the stock’s price change by the current divisor. To find the current divisor, it can be located on the Dow Jones Indexes site.

The DJIA is about 110 years old and it is the most watched and referred to index in the United States. The ETF below tracks the Dow and gives investors access to the top companies within:

• Diamonds Trust Series 1 (DIA): down 11.4% year-to-date; up 18.8% in the last two weeks