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The Problem With Dow ETFs

Stocks in this article: DIA DOD

By Michael Johnston of ETF Database

NEW YORK ( TheStreet) -- The Dow Jones Industrial Average is one of the most widely followed stock indices in the world, seen as a barometer of U.S. equity market performance.

The rise of the ETF industry has given investors the option to track the performance of this benchmark, and a number of spinoffs have increased ETF options for investing in the Dow. But before buying into one of the Dow ETFs available, investors should be aware of the potential drawbacks and limitations that an ETF based on the index may have.

History of the Dow

The Dow is one of the market indices created by Wall Street Journal editor and Dow Jones founder Charles Dow, who named the benchmark jointly after statistician Edward Jones.

The benchmark is the second oldest in the U.S., behind only the Dow Jones Transportation Index. The composition of the index has changed gradually over the years, and the current version of the benchmark has little exposure to the industrial sector that once dominated its holdings and accounts for the "industrial" in its name. Exxon Mobil (XOM) has been included in the DJIA since 1928 (originally as Standard Oil), while other components were added as recently as 2009.

Dow Drawbacks

The Dow's popularity in the investing community is perhaps more attributable to the long history and visibility of the index rather than its efficiency as an equity market benchmark. The Dow is a price-weighted benchmark, meaning that higher-priced stocks are given more weight than lower-priced counterparts.

Moreover, because the index includes only 30 component stocks, it doesn't always provide a good representation of overall market performance.

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