Is the Dow Jones Index Worth Buying?

The Dow Jones Index has been increasingly described as less relevant a proxy for the US economy. With the rise of big tech and consumerism, the S&P500 is seen as a better reflection of the US economy due to its constituents. Although services are an increasing part of a country's wealth, a country's ability to manufacture something is seen as having greater value. Could we therefore have overlooked the Dow Jones, providing us with a long-term opportunity? 

Takeaways

• What is the Dow Jones Index

• Why is it seen as important

• How has the Dow Jones become overlooked

• What is the investment opportunity

• How to gain exposure to the Dow

What is the Dow Jones Index?

The Dow Jones Industrial Average to give it it's full name, is a US stock market whose constituents include the 30 largest companies listed in the USA. As a result it is seen as a proxy for the US economy. Although the introduction of huge stimulus packages by the NY Fed has created a disconnect between the  stock market and reality, it is widely followed by the media.

Why do we attach importance to it?

Its importance is seemingly more historical than practical. Historically wealth was through tangible products such as factories, steel mills and rail networks. Today wealth is arguably increasingly measured on ownership of client data, and using it to predict consumer's behaviour for financial gain. The Dow Jones included many industrial companies when it was first created.

A countries national wealth is partly based on its balance of payments. This is the relationship between imports and exports. A country which exports more than it imports has a surplus. Selling tangible products such as oil, coal, or finished products such as cars will bring back capital (cash) into the country. As the Dow Jones includes such companies, it is seen as a good reflection of the USA's manufacturing wealth.

How the growth of services has complicated things

The problem with that assessment, is the growth of the service sector. When a software company builds a platform on which people buy and sell services, wealth is also being created.

How this is added to the wealth of a nation is not easy though. Traditional methods such as corporation tax is difficult when large multi-nationals avoid it. Yet nation states do get richer by virtue of earnings from these platforms through taxing an individual's income.

It is not perfect...

It is impossible to ignore the rise of technology in today's world. We are dependent on it in times of lock downs and rely on it to facilitate working from home. Tech companies do not make up the majority of the Dow Jones. As a result if you only invest in it, you will be losing out.

There is also some criticism as to how the value of its constituents are determined. Although no system is perfect, the concern is that this methodology means companies are attached too much importance relative to their size. In turn this means the index is not representative.

Why should I invest in the Dow Jones Index?

In recent years, the market rally has been driven by the big tech firms. Although they are likely to keep growing, they also likely to incur increased taxes and regulation. In turn this will reduce their profit growth, and will lead to investors moving into sector rotations.

Companies which we rely on such as Johnson & Johnson, Visa, Merck & Co are likely to loom large in investors conscious. Let's be clear, none of these companies are cheap, but they are no where near as expensive as the big tech firms. A contrarian investor is probably already building positions in them!

The Dow Jones should be a core holding.

Predicting where each of these companies will be in 5 years time is night impossible, but overlooking how much we use them can mean missing out on undervalued stocks. As a result having a core holding in the Dow Jones is sensible. In particular, as investors update their stock portfolios with these stocks, they should re-rate upwards.

How do I gain exposure to the Dow?

The best way to gain access to the Dow Jones is by buying a passive investment. The iShares Dow Jones Industrial Average is a good example, although you will have to buy it in US dollar. (watch those Foreign exchange transaction fees which can be very (too) expensive).

Conclusion

Good investing is boring. Any investor looking for an investment which will make $$$ in a month will have just wasted 3 mins. For investors who want to grow their capital then buying a replication of the Dow Jones can only mean one thing: becoming a successful investor.

Fundamentally, there is basic need for manufacturing and finished goods which will never go away, no matter how long we spend on social media. Markets today are driven by relentless news flow with the big tech companies at the forefront of this.

Eventually fashion will change, as it always does, and we will focus on what is important for living. Having a holding of the Dow Jones today will put you ahead of the pack - where every investor should look to be.

The writer of this article is a holder of the iShares Dow Jones ETF.