The largest companies by market capitalization are in the Dow Jones Industrial Average. It has well-known giants such as Apple, Exxon and JP Morgan. In fact, of the five most widely held stocks in 401ks, according to a CNBC study, Apple, Amazon, Google and Wells Fargo.* It makes sens to utilize a Dow inverse ETF if you have significant exposure to these blue chips.
There are pros and cons with using the inverse ETF on the Dow Jones, the ‘Short Dow 30’ (‘DOG’) Dow Jones inverse ETF. It is a very liquid fund with over $277 million in assets and does have. Since the index is price weighted while most indexes are market cap weighted, you’re not getting a true representation of the broader markets and thus, your portfolio. For example, if you own Apple, and you use DOG to hedge, you may not be getting the full hedging benefits since Apple is understated as a Dow component when compared to the S&P 500, the NASDAQ Composite or NASDAQ 100. Goldman Sachs, Boeing and 3M make up the bulk of the index’s weights.
What’s the Concern for the Dow Jones Industrial Average?
From a valuation standpoint, the Dow Jones is very expensive historically. But that depends on which valuation method you choose. We like to use the dividend yield compares to its historical levels. Outside of the tech bubble, the dividend yield on Dow Jones Industrial average has never been so low, coming in at in 2013.
Also, the stocks in the Dow suffer from being the last to the party and have a notorious reputation for marking the tops in markets. Think back in 1998-1999 when the tech giants Cisco, Microsoft and Intel were added to the Dow. It certainly appears that after waiting for Apple to grow to three-quarters of a trillion dollars in market cap, Apple’s addition may be portending trouble for the stock markets.
Lastly, since many of the most widely held stocks in America, including Microsoft, Johnson and Johnson and Wells Fargo are all in the Dow, it probably contains a stock you own, either individually or in a mutual fund or ETF. Consider hedging exposure with a Dow Jones inverse ETF.
How to Hedge Blue Chips with a Dow Jones Inverse ETF
ProShares offers three inverse ETFs on the Dow Jones Industrial average (a single, double and triple leveraged inverse ETFs). They offer the single inverse ETF, the ‘Short Dow 30’ (DOG) and leveraged inverse ETFs (DXD, -2X) and (SDOW, -3X).
There are pros and cons with using the ‘Short Dow 30’ (‘DOG’) inverse ETF, DOG. It is a very liquid fund with over $277 million in assets and does have over half a million shares typically traded daily. The index is price weighted while most indexes are market cap weighted, it’s not a true representation of the broader markets and thus, your portfolio. For example, if you own Apple, and you use the Dow inverse ETF to hedge AAPL, you may not be getting the full hedging benefits since Apple is understated as a Dow component,compared to the S&P 500, the NASDAQ Composite or NASDAQ 100.
Inverse ETFs mentioned: