With investors favoring large- and mega-cap stocks and lower volatility names this year, revisiting a pair of exchange traded funds that track the venerable Dow Jones Industrial Average could be a rewarding strategy.
Those ETFs include the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA), which tracks the Dow Jones Industrial Average, and the Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEArca: DJD), which weighs the 30 Dow stocks by yield. As we head toward the third quarter and the start of the earnings season, a strengthening U.S. dollar could weigh on S&P 500 and large-cap exchange traded funds that have exposure to multi-national companies with a global footprint.
As we look to the second half of the year, investors should be concerned about the impact of a stronger U.S. dollar and of lower global economic growth on the sales and earnings for S&P 500 companies.
Related: How U.S. Stock ETFs Stack Up to Brexit Concerns
DJD provides an alternative, strategic beta approach to the DJIA by weighting each security by dividend yield, instead of price. By comparison, DIA weights components based on the stock price.
[related_stories]“It’s a common investor perception that larger companies will be more resilient to bear markets than smaller companies. This idea stems from the perception that larger companies are consistently profitable, maintain a healthy balance sheet and generate massive cash flow, all of which should allow them to weather any market storm better than smaller companies,” according to Investopedia.
Alternatively, investors may focus on mid- and small-cap companies that have less exposure to currency risks as they target domestic markets.
Related: Small- and Mid-Cap ETFs Light Up Investors
Mega-cap ETFs, such as DIA and DJD could gain additional benefit if the Federal Reserve pursues raising interest rates later this year. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.
Mega-cap ETFs can also help investors endure a growing list of concerns, such as an ongoing earnings recession in the U.S., an upcoming U.S. presidential election, an unclear outlook from the Federal Reserve and global economic weakness, especially with risks out of China and potential yuan currency devaluations.
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SPDR Dow Jones Industrial Average ETF
