First Trust launches equally weighted DJIA ETF

Aug 11th, 2017 | By | Category: Equities

First Trust Advisors has launched the First Trust Dow 30 Equal Weight ETF (NYSE Arca: EDOW), providing equally weighted exposure to the 30 constituents of the Dow Jones Industrial Average (DJIA).

Ryan Issakainen, senior vice president, exchange-traded fund strategist at First Trust Advisors.

Ryan Issakainen, senior vice president, exchange-traded fund strategist at First Trust Advisors.

The DJIA, a price-weighted average of 30 stocks traded on the New York Stock Exchange and the NASDAQ, was devised in 1896 by Charles Dow, a US journalist also known for starting the Wall Street Journal. It is one of the oldest, single most-watched indices in the world and is a reflection of the health of the broad US economy.

The original constituents were virtually all industrial in nature, reflecting the make-up of the US economy at the time. As the US economy has evolved, so has the constituents within the index. Today the index comprises several financial companies, such as JP Morgan Chase and Goldman Sachs, as well as technology giants such as Intel, Apple and IBM. Coca-Cola, Johnson & Johnson, McDonalds, Pfizer and Walt Disney are also current constituents. The current weighted-average market cap of the index is $205 billion.

By tracking an equally weighted version of the DJIA, EDOW may help investors to reduce stock specific risk relative to price weighting.

“The DJIA has been an important barometer for blue-chip US stocks,” said Ryan Issakainen, senior vice president, exchange-traded fund strategist at First Trust Advisors. “We believe that the equally weighted version of this index is a noteworthy enhancement for ETF investors, in comparison to the traditional price-weighted version of the index.”

“We are excited to license the DJIA Equal Weight Index to First Trust Advisors,” added Joe Kairen, senior director, strategy indices at S&P Dow Jones Indices. “The equal-weighted design of the index allows for each of the 30 companies in the DJIA, an iconic indicator of investor sentiment for more than 120 years, to have the same effect on its performance.”

The largest sector exposures for the price-weighted DJIA are industrials (21.7%), information technology (16.9%), financials (16.8%), consumer discretionary (14.7%) and health care (13.2%). While the same five sectors appear in the top five exposures for the equally weighted index, their weightings are more moderately dispersed: information technology (19.9%), industrials (16.9%), financials (13.7%), consumer discretionary (13.4%) and health care (13.2%).

Under the equally weighted approach, each company in the index has a 3.3% weight as of the index’s rebalancing date. This reduces idiosyncratic risk compared to the price-weighted version by lowering the weight of companies such as Boeing (7.3% weight in regular DJIA), Goldman Sachs (7.2%), 3M (6.4%), UnitedHealth (6.1%) and Apple (5.0%).

EDOW has a total expense ratio (TER) of 0.50%.

The largest (and cheapest) ETF to track the price-weighted DJIA is the SPDR Dow Jones Industrial Average ETF (NYSE Arca: DIA). It has $17.5bn in assets under management (AUM) and a TER of 0.17%.

In Europe, the largest (and cheapest) ETF to track the price-weighted DJIA is the iShares Dow Jones Industrial Average UCITS ETF (LON: CIND) which has $310 million in AUM. Its TER is 0.33%. CIND trades in US dollars but is also available in a British pound-denominated share class (Ticker: CID1).

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