The Dow Jones Industrial Average is one of the oldest and most widely followed U.S. equity indexes, but the blue-chip benchmark has its flaws. Chief among those flaws is a weighting methodology that assigns the largest weights to Dow components based on price tag.
To put the skew created by the Dow’s price-weighting methodology in perspective, Goldman Sachs (NYSE: GS) is currently the Dow’s largest holding despite the fact that Apple (NasdaqGS: AAPL), also a Dow component, is more than seven times the size of Goldman by market value.
One good thing about the Dow is that all 30 of its member firms pay dividends and some of those names, including Procter & Gamble (NYSE: PG) and Johnson & Johnson (NYSE: JNJ), have some of the longest dividend increase streaks among all U.S. companies. The Guggenheim Dow Jones Industrial Average Dividend ETF (NYSEArca: DJD) is a new ETF that capitalizes on the Dow dividend theme.
DJD weights the Dow’s 30 stocks by trailing 12-month dividend yield. The new ETF tracks the Dow Jones Industrial Average Yield Weighted Index.
By using the dividend yield weighting methodology, Chevron (NYSE: CVX), Verizon (NYSE: VZ) and General Electric (NYSE: GE) are DJD’s top three holdings. None of those stocks are top 10 holdings in the traditional Dow index. In fact, McDonald’s (NYSE: MCD) is the only top 10 holding in the new Guggenheim ETF that is also a top 10 component in the Dow Jones Industrial Average.
“All 30 companies in the DJIA® must meet certain size, listing and liquidity requirements. Only those
companies among them with a track record of consistent dividend payments over the previous 12 months are eligible for inclusion in the DJIA Yield Weighted index,” said Guggenheim Managing Director William Belden in a statement.
DJD charges 0.3% per year, or $30 for every $10,000 invested.
Tom Lydon’s clients own shares of Apple and P&G.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.