Forget the Dow Jones – Buy This Great ETF Instead

If you are at all interested in the stock market and indices, you are probably familiar with the Dow Jones Industrial Average. This is often considered representative of the entire U.S. stock market, but in reality it shouldn’t be.

You also probably know that investing in index funds is smart. This is very true. But don’t go looking for an index fund that tracks the Dow Jones. Instead, here are index funds with stronger performance and a more promising future.

Image source: Getty Images.

What’s wrong with the Dow Jones Industrial Average?

Here’s the most surprising thing about “Dow”: It contains only 30 stocks. Stock indices first appeared in 1896. 12 stock. However, today the holdings are: Amazon.com and american express to walmart and walt disney. Although it aims to represent the U.S. economy, it only holds 30 stocks, so many major companies, including Google’s parent company, are excluded. alphabetWarren Buffett’s Berkshire Hathawayand bank of america.

Another problem with the Dow is that it is price weighted. Its value is the average of the stock prices of all its components. (It’s a little more complicated than that, as it involves a “divisor”.) S&P 500 The index, which is much more representative of the U.S. economy, is “market weighted.” This means that its components are weighted according to their market value. microsoft, apologizeand nvidiaIt has the greatest influence.

In the Dow, stocks with the highest stock prices are the most influential. UnitedHealth GroupWith the stock recently nearing $500, it will impact the index about 10 times more than before. cisco systemsUnitedHealth is only about 2.5 times the size of Cisco, but its recent price was closer to $46 per share.

Dow Jones as an Investment

You can invest in the Dow if you want, and here are the main ways to do so: SPDR Dow Jones Industrial Average ETF (dia). Its long-term performance has not been too shabby, with an average annual profit margin of 11.05% over the past 10 years and 12.92% over the past 15 years. Still, we could do better, especially since the Dow’s weighting system is so arbitrary. So you might want to skip the Dow in favor of the ETFs below.

Meet the Vanguard Information Technology ETF

that much Vanguard Information Technology ETF (VGT 0.23%) It has a lot to offer investors looking for solid growth over the long term. (Remember that in the short term, the overall stock market is unpredictable and can rise or fall sharply in any given year, and the index funds that track it can also rise or fall sharply.)

First of all, the Vanguard Information Technology ETF boasts a low “expense ratio,” or annual fee, of just 0.10%. So, if you put in $1,000, you will pay a fee of about $1 per year. Check out past performance and see how it compares to the Dow ETF and major S&P 500 ETFs.

Source: Morningstar.com and Yahoo.com as of June 15, 2024.

Impressive, right? Remember that the overall stock market has averaged returns of close to 10% per year over long periods of time. The returns above even exceed a 15% return. Of course, we cannot expect past performance to be repeated. It all depends on the performance of the components. So what are its components? I’m glad you asked!

What’s included in the Vanguard Information Technology ETF?

According to Vanguard, the ETF “seeks to track the performance of a benchmark index that measures the investment returns of stocks in the information technology sector.” And this “includes stocks of companies that provide services to the electronics and computer industries or manufacture products based on the latest applied sciences.”

It recently included 313 stocks and ranked in the top 10 as of the end of April.

Source: Vanguard.

We see that there are a variety of technology-focused companies, along with giant corporations that have enormous influence. This isn’t necessarily a bad thing (and some technology-focused ETFs have much larger weightings of the same companies). After all, these huge companies got big by doing well and simply growing, and that’s what we all want to have in our portfolios.

So, if it’s right for you – that is, if you’re optimistic about the growth potential of the companies you invest in – consider adding shares of the Vanguard Information Technology ETF to your portfolio. Be prepared for more volatility than, say, a Dow-focused ETF or S&P 500 index fund. However, you may expect higher returns than those funds offer.