The Stock Market Just Did Something It Last Did in 1978. History Says This Will Happen Next.

The Dow Jones Industrial Average (^DJI 0.04%), one in every of three main U.S. inventory market indexes, had declined in 9 straight buying and selling periods as of Tuesday, Dec. 17. The final time the Dow Jones strung collectively a shedding streak that lengthy was February 1978.

Specifically, the index fell greater than 4% in the course of the 9 buying and selling days that ended on Feb. 22, 1978. But the Dow Jones rebounded 14% within the subsequent three months and surged 20% over the subsequent six months. Investors who count on an analogous final result this time can get publicity with the SPDR Dow Jones Industrial Average ETF Trust (DIA 0.07%).

Here’s the bull and bear instances for proudly owning a Dow Jones exchange-traded fund (ETF) proper now.

The bull case: The Dow Jones tracks 30 blue chip firms

The Dow Jones Industrial Average is the oldest of the three hottest U.S. inventory market indexes. It was first launched in May 1896 however solely tracked 12 industrial shares on the time. The index has developed to incorporate 30 firms from 9 of the 11 market sectors. The two sectors not represented are utilities and actual property.

The Dow Jones is not ruled by particular inclusion standards, however the choice committee tends to choose shares with three traits: glorious reputations, sustained earnings development, and widespread curiosity amongst buyers. To that finish, the Dow Jones is usually considered as a benchmark for blue chip (high-quality) worth shares.

The SPDR Dow Jones Industrial Average ETF Trust tracks the efficiency of the Dow Jones. The ETF lets buyers diversify capital throughout 30 high-quality firms that play a central position in driving the U.S. economic system. The 10 largest holdings are listed by weight beneath:

1. Goldman Sachs: 8.2%
2. UnitedHealth Group: 6.9%
3. Microsoft: 6.3%
4. Home Depot: 5.7%
5. Caterpillar: 5.3%
6. Sherwin-Williams: 5.1%
7. Salesforce: 5%
8. Visa: 4.4%
9. American Express: 4.2%
10. McDonald’s: 4.1%

The final merchandise of consequence is the expense ratio. The SPDR Dow Jones Industrial Average ETF Trust has a beneath common expense ratio of 0.16%. That means buyers pays $16 per 12 months in charges on each $10,000 invested within the ETF.

The bear case: The Dow Jones has persistently underperformed the S&P 500

The Dow Jones returned 151% over the last decade, which is equal to 9.6% yearly. Meanwhile, the S&P 500 superior 200%, compounding at 11.6% yearly. The very same sample reveals up over the past one, three, and 5 years. In different phrases, the Dow Jones has persistently underperformed the S&P 500.

Additionally, the Dow Jones at present trades at a costlier valuation relative to its projected development. Specifically, its constituent firms, in mixture, are forecast to develop earnings at 11.3% yearly within the subsequent three to 5 years. Dividing that determine into its present valuation of 21.1 instances earnings provides a price-to-earnings-to-growth (PEG) ratio of 1.9. That’s comparatively costly.

Comparatively, S&P 500 firms, in mixture, are anticipated to report earnings development of 15.1% yearly throughout the identical interval. Dividing that quantity into its present valuation of 24.7 instances earnings provides a PEG ratio of 1.6. That metric is not low cost, however it’s cheaper than the Dow Jones’ PEG ratio.

Here’s the underside line: History says the Dow Jones may rebound sharply within the coming weeks and months. But the index has traditionally underperformed the S&P 500 and has a better valuation.

To that finish, I’m in no hurry so as to add a Dow Jones ETF to my portfolio. In truth, I’d purchase an S&P 500 ETF earlier than a Dow Jones ETF with out pondering twice.