Are you confused between S&P 500 and Dow Jones ETFs? Both S&P 500 ETFs and Dow Jones ETFs are the most popular in the market. In general, you will face the same risks in both cases.
However, the main difference between the two funds is that the S&P ETF tracks all 500 companies of the S&P 500, while the Dow Jones ETF only tracks 30 companies of it.
Interestingly, both these ETFs have a higher correlation. This means that both of them have the tendency to move in the same direction. Meanwhile, there are some differences as well that you need to be aware of as an investor.
Therefore, to get an idea of how S&P 500 ETFs differ from Dow Jones ETFs, read on.
S&P 500 ETFs vs. Dow Jones ETFs – Major Differences
The S&P 500 ETF or SPY tracks all the 500 companies that list in the S&P 500 index. On the other hand, the Dow Jones ETF or the DIA tracks only the 30 companies that are present in the DJIA chart (Dow Jones Industrial Average).
However, as already discussed, there are some similarities between the two ETFs. Despite that, since these two ETFs track different indices, they have different construction features. Hence, as an investor, it is crucial that you understand the major differences between the two.
What Is S&P 500 ETFs?
Basically, the S&P 500 ETF or the SPDR S&P 500 ETF Trust (SPY) tracks all the 500 companies listed in the S&P 500 index.
Here, the index has a committee that decides what companies they must include in the ETF. That is why you can observe a small difference in holdings from the main S&P 500 index.
However, the committee has its own guidelines for making its own decisions. Apart from that, the also factor in considerations like profitability, liquidity, and overall balance. In addition, the committee holds regular meetings to review its index from time to time.
Actually, the S&P 500 index runs with the help of a weighted average market cap. This means that a larger company will have a bigger weight in the S&P 500 index. Here, the market cap of a company is the product of the price of each stock of the company and the number of outstanding stocks of the same company.
Due to this weightage system, a company that has a large number of shares and a higher stock price will have a bigger weightage in the index.
In addition to that, the popularity of S&P 500 ETFs is also high because the expense ratio is low (0.0945%).
Approximate Weightage of Sectors in the S&P 500 ETF
The following are the top sectors of the S&P 500 ETF, along with an approximate percentage of their weightings within the ETF:
- Healthcare: 13.30%
- Information Technology: 28.23%
- Finance: 12.46%
- Industrials: 8.46%
- Real Estate: 2.53%
- Energy: 4.04%
- Communication Services: 8.20%
- Consumer Staples: 6.74%
- Consumer Discretionary: 10.70%
- Utilities: 2.60%
Furthermore, it is also important to consider risks and liquidity. Here, the S&P 500 ETF has high liquidity since there are many buyers and sellers on a regular basis. Hence, it offers you the chance to enter and exit easily. On the other hand, an S&P 500 ETF comes with low risk. However, this risk seems to fluctuate from time to time.
What are Dow Jones ETFs
Since the DJIA live chart contains only 30 companies, these are some of the biggest companies in the United States. Basically, the SPDR Dow Jones Industrial Average ETF Trust (DIA) committee contains Wall Street Journal editors. Here, these editors choose the companies that must be present in the DJIA ETF.
Interestingly, this index does not have any technical rules for the inclusion of these companies. Here, the committee only chooses those companies that are substantial. Also, these companies must represent a major portion of various economic activities in the United States.
In addition to that, if you check out the DJIA chart today, you will find that the expense ratio is pretty low (0.16%). Despite that, it is still higher if you compare it to the S&P 500 ETF.
What is the approximate weightage of sectors in the Dow Jones ETF?
The following are the top sectors of the Dow Jones ETF, along with an approximate percentage of their weightings within the ETF:
- Healthcare: 18.76%
- Information Technology: 18.62%
- Finance: 20.15%
- Industrials: 14.64%
- Energy: 2.97%
- Materials: 1.03%
- Communication Services: 2.45%
- Consumer Staples: 7.75%
- Consumer Discretionary: 13.64%
In addition to that, you must also consider the risks and liquidity of the Dow Jones ETF. Actually, due to a high number of buyers and sellers, the Dow Jones ETF has high liquidity. Thereby, you can change your position from time to time quite easily (if you want to).
Furthermore, the risk level of the Dow Jones ETF is quite low (even lower than the S&P 500 ETF).
How Are the S&P 500 ETF and the Dow Jones ETF Correlated?
Basically, there is a high level of correlation between the S&P 500 ETF and the Dow Jones ETF. Hence, when you see the S&P 500 ETF rising, it also means that Dow Jones ETFs are not far behind.
This happens due to the fact that similar component companies are present in both indices. Moreover, all these companies are some of the biggest in the United States.
However, the weightings of the common companies in both the indices are different. Hence, when you compare those two funds, you will obviously see differences in money allocation to those companies. Here, the S&P 500 is more diverse.
Which One to Invest In?
Your investment goals determine which of the ETFs you want to invest in. Here, both the S&P 500 ETF and the Dow Jones ETF serve their respective purposes well enough. However, you will get better exposure in the S&P 500 ETF since it contains 500 companies.
So, do some research of your own and invest as per the direction of your investment goals.
