A Fund That Won by Tracking the Dow

Though it is representative of many industries, the portfolio is skewed toward a few holdings because of the benchmark's peculiar weighting system. Under the Dow Jones rules, stocks are weighted according to their share prices. So the biggest holding is IBM (IBM), which has a share price of $199 and accounts for 11% of assets. Microsoft (MSFT) only accounts for 1.5% of assets because its share price is around $27.

This approach is very different from the S&P 500 which weights every stock according to the market value of the shares. In the S&P, IBM and Microsoft both account for about 1.5% of assets. Academic researchers have long argued that the market-cap weighting of the S&P 500 is a better system that accurately reflects the realities of the economy.

>>>>Also see: 5 Hated Stocks That Could Squeeze Higher in March

The Dow has other peculiarities. It excludes Apple (AAPL) as well as transportation and utilities stocks. The Dow underweights financials compared to the S&P 500. The underweighting helped the benchmark outperform when bank shares collapsed in 2008. For the year, the Dow ETF lost 32%, compared to a decline of 36.8% for SPDR 500.

For investors who want a dose of giant stocks in a more modern package, Morningstar's Alex Bryan suggests Vanguard Dividend Appreciation (VIG). The ETF owns companies that have increased their dividends in each of the past ten years. Holdings are weighted according to their market caps. Stocks in the portfolio include many Dow names, such Wal-Mart (WMT) and Procter & Gamble (PG). Holding 133 stocks, the Vanguard ETF is more broadly diversified than the Dow.

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This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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