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What is a Dow ETF?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 23 September 2016
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A Dow ETF is a modern type of fund offering that single investors can buy into for a chance at diversified gains from the U.S. stock market. The Dow Jones Industrial Average is a major index of American stocks traded on national exchanges. Investors who use a Dow ETF can make gains based on the collective returns of Dow-included stocks over a given holding period.

The exchange traded fund, or ETF, is a new kind of fund that is easy to buy and sell. ETFs were developed significantly after mutual funds, which often come with a variety of limitations, including minimum contributions and less trading flexibility. Where ETFs may also have minimum contributions and expense ratios, or fees paid to fund managers, they are often traded just like single stocks, which makes them appealing to investors who want to engage in short-term trading, or put their money into holdings that they can liquidate in a split second during the middle of a market day.

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As a specific kind of ETF, the Dow ETF helps to track the returns of stocks on the Dow Jones index. Others different kinds of ETFs include currency ETFs, which have holdings based on national currency values, commodity ETFs that provide opportunities to speculate on physical goods, and bond ETFs which allow investors to more easily “buy into” corporate or municipal debt. As a niche product, the Dow ETF lets investors get into the action on wherever this major American index is headed.

Some financial professionals point out that there are major disadvantages and risks for investing in Dow ETFs. One of these is that the Dow Jones is vulnerable to huge price swings, experiencing big gains and losses daily. This is obvious from a casual glance at a historic Dow Jones tracking chart.

Another potential disadvantage around the Dow Jones ETF is that the Dow only includes about 30 stocks. Some investors like to diversify much more widely, or get into smaller stocks that have more room to grow. These investors would be better served by looking at mid-cap or small-cap ETFs that include lower priced and less established stocks. For a diversified ETF offering on a large cap market, experts suggest that an ETF based on the S&P 500 will get investors a greater diversity of American stock holdings. On the other hand, some will still want to buy into a Dow ETF to try for gains based on this benchmark of the American stock market, especially during times when the ticker seems to be continually advancing upward.

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