I have long thought (not a unique idea) that the Dow Jones 30 is a useless benchmark because of its narrowness and its price weighting. As such I have never given the Dow Diamonds (DIA) any consideration.
In the current BusinessWeek, Aaron Pressman wrote an article (subscription required) questioning whether GM should be removed from the Dow 30. He asks a good question in wondering when was the last time anyone thought of GM as a blue chip stock.
My thought to this point was OK, another Dow composition article. But Aaron brought up another, more interesting point which is that many people now own the Dow Jones 30 and by keeping GM in there, the keepers of the Dow are doing DIA holders a disservice. Obviously there is no legal obligation on the part of Dow Jones to do anything but the ETF does put a different kind of focus on the average.
For the life of me I have no idea why someone would ever by DIA when there are so many other large cap proxies with fewer flaws.
Wikinvest Wire
6 comments:
The current problem with the diamonds is similar to the reverse problem when the S&P chooses stocks to be added to the index. The famous case was when Yahoo was not added until near the top. The bottom in GM will be called the day it is dropped from the index.
my question would be: What do you think are currently the best options for capturing the large cap growth section of the market---ETF's, individual stocks, etc??
I think Robert Arnott is on the right track in saying cap weighted indexes lead to overweighting those stocks that are over-valued and underweighting those that are under-valued. (Google Mr. Arnott's name if your not familiar with his work.) Put RSP vs SPY on a price chart for three years to get the message.
Happy New Year Jack Miller - you put up some great posts!
Old Geezer
great contrarian point
Roger I think the DIA is used by a lot of market timers and options traders. That is the only purpose I see for it. If you want quick exposure to the Dow it's an easy way to go, as is the QQQQ and SPY for each respective index.
The Dow is a dying index. It is not "The Market" , not does it represent much of it. Who would buy the DIA as a primary holding?
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