What the Dow Jones Hitting 40,000 Means for ETFs

The 30 company index remains relevant after 127 years.

First there was LeBron James reaching 40,000 points in March, the first NBA player to do so. Two days later, Japan’s Nikkei stock average reached that number (James took 21 years to get there, while the Nikkei required 67 despite having come within 4% of it in 1989.)  

On Thursday, the venerable Dow Jones Industrial Average, with its strangely effective price-weighting system, only 30 stocks and a penchant for going years between component stock changes, also made it to 40,000. I’m a “Dow-phile” and not afraid to admit it, so I'll pop the cork and reflect on what the Dow is and why after 127 years it's important. 

With the S&P 500 and Nasdaq 100 hogging the spotlight, forgetting that in many ways the Dow 30 is still the best reflection of the U.S. stock market is easy. Remember that the committee that runs the index does so with the intent of making those 30 stocks reflect the broad U.S. economy.  

That’s why the recent addition of Amazon was important for Dow afficionados. It joined Apple and Microsoft to give the index a more contemporary feel. And considering that Walmart is already in the Dow, the consumer spending segment of the economy is well-represented.

Dow Jones and the 30-Stock Portfolio

The 30-stock portfolio is a great way to focus investing efforts on a manageable watchlist, or a core ETF in a portfolio, to then surround with, well, whatever an investor or advisor wants. The $31 billion SPDR Dow Jones Industrial Average ETF (DIA) is the main outlet for those who want to own the Dow in its traditional form. There are also smaller ETFs that tilt the Dow toward yield, or equal weight the positions.  

And speaking of equal weighting, since the start of what I call “the new inflation era” to begin the year 2022, DIA has outpaced the equal-weighted Invesco S&P 500 Equal Weight ETF (RSP) by 14.9% to 7.6% cumulatively, in that more than 28-month time frame. And to the likely surprise of many investors, DIA has been neck and neck with the SPDR S&P 500 ETF Trust (SPY), which has gained 15.5% since the start of 2022.  

So, ETF investors and indeed equity investors in general should celebrate the Dow Jones Industrial Average. Not because it hit a big round number for the first time. But because it helps shield investors from the potentially dangerous belief that Magnificent Seven, tech stocks and bitcoin are the only ways to make money in modern markets.