The Dow Jones Industrial Average (DJIA) is a price-weighted index containing 30 US large-cap stocks covering a variety of industries. It was originally established in 1896, making it one of the older stock market indices in the world.

With only 30 constituents in its portfolio, the index is considered to be significantly more concentrated compared to other popular indices like the S&P 500. However, only some of the most influential businesses in the United States qualify to join its ranks.

That’s why many investors continue to track its performance over 100 years later.

How to invest in the Dow Jones?

Just like any other stock market index, the Dow Jones is not a directly tradable financial security. It’s merely a list of businesses managed by a firm called S&P Dow Jones Indices, which is a subsidiary of S&P Global Inc.

Therefore, if investors want to track and replicate its performance, the most cost-effective way is to invest in a mutual fund or exchange-traded fund that follows the Dow Jones.

1. Open a brokerage account

To access the financial markets and start investing, an investor must have a brokerage account. These are sometimes referred to as investment accounts.

However, selecting a broker that supports international trading, specifically one that grants access to the US stock market, is important. Over here in the UK, not many Dow Jones index funds are listed on the London Stock Exchange compared to the United States. By not having access to the New York Stock Exchange or Nasdaq Exchange, it could severely limit investors’ options.

Beyond this, other critical factors need to be considered, including platform features, account fees, and currency exchange fees. Each brokerage account has pros and cons. Therefore investors must choose which one is most suitable for their personal circumstances and intended investing strategy.

• Standard Account – This is the most common type of investment account. Investors deposit capital which can then be used to invest in an array of financial products, including stocks, bonds, mutual funds, trusts, and ETFs. In the United Kingdom, all capital gains and dividends received through investments in a standard trading account are subject to tax.
• Employer-Sponsored Retirement Account – This is a special investment account with certain tax benefits. However, withdrawals from this account are limited until investors reach a certain age. They are designed to be a saving instrument for pensions. The most common type of employer-sponsored retirement account in the United States is a 401(k).
• Stocks and Shares ISA Account – This is a special tax-efficient investment account for British investors only. All capital gains and dividends received from investments within a Stocks and Shares ISA are tax-free. However, investors are limited to depositing a maximum of £20,000 per year.
• Self-Invested Personal Pension (SIPP) Account – This is a particular tax-deferred investment account for British investors only. Capital gains and dividends received from investments are protected from tax. However, investors cannot withdraw any funds until reaching the age of 55 (57 from 2028). When funds are taken out, they are taxed as regular income.

2. Pick an index fund

With an investment account open, the next step is to pick a suitable index tracker fund. For individuals seeking to invest in the Dow Jones Industrial Average, a Dow Jones index tracker fund is required. However, investors also need to consider what type of index fund they want to own – a mutual fund or exchange-traded fund (ETF).

A mutual fund is not traded on an exchange. Instead, orders to buy and sell shares within a mutual fund are settled once daily at the end of each trading session. On the other hand, ETFs are traded on an exchange, and orders are executed instantly.

Investors should be aware of additional differences between the two investment vehicles. We’ve written a complete guide that can be accessed below.

Related: ETF vs Mutual Fund: What’s the Difference?

Beyond deciding on the index fund type, additional factors must be considered.

• Expense Ratio – As index tracker funds are typically passively managed, the annual management fees are reasonably low. However, they are not zero. And some may even charge entry fees when first buying shares or exit fees when selling shares. The expense ratio combines all these costs, adversely affecting the overall investment return. On average, the expense ratio of a passive fund typically lies between 0.05% and 0.15%. Generally speaking, investors should focus on the funds that charge the lowest fees.
• Minimum Investment Requirements – Some index tracker funds require investors to purchase a minimum amount of shares. This is typically more common among certain mutual funds rather than ETFs. Nevertheless, minimum investment requirements could create barriers to entry for lower net-worth investors.
• Dividends – All shareholders in an index fund are entitled to receive dividends from the companies inside the fund’s investment portfolio. However, depending on the dividend policy, any received income may be automatically reinvested into the fund’s portfolio rather than distributed to shareholders’ investment accounts. This type of dividend policy is more commonly referred to as accumulation.

An investor could reduce their expense ratio to zero by not investing in an index fund but instead buying the individual stocks of the index themselves.

However, this approach would likely rack up many transaction and commission fees in practice. It also requires more effort as portfolio rebalancing would no longer be handled by a professional fund manager but rather the individual investor themselves. In other words, taking this alternative approach is unlikely to be cost-effective.

3. Buy shares in the Index fund

With a brokerage account opened and a Dow Jones index fund selected, investors can now buy shares and replicate the index’s performance.

As a reminder, if shares in a mutual index fund are purchased, the transaction will not be executed until the end of the current or next trading session. However, trades for an index ETF will be executed instantly while the stock market is open.

Advantages of investing in the Dow Jones

Investing with index funds instead of picking individual stocks can provide investors with several key benefits. In the case of the Dow Jones, these include:

• Instant diversification – Investors indirectly purchase shares in all the companies that make up the Dow Jones Industrial Average. Within a single transaction, they gain exposure to the Healthcare, Financials, Consumer Discretionary, Industrials, Technology, Energy, Consumer Staples, Materials, and Communications sectors. However, it’s important to highlight that with only 30 companies, the level of diversification isn’t as significant versus an alternative index such as the S&P 500 index.
• Lower Volatility – As the constituent companies within the Dow Jones are all established large-cap enterprises, the index has typically been less volatile. This has proven to be particularly advantageous during economic turmoil, as the defensive nature of its businesses has protected portfolios from significant declines compared to other indices.
• Low Fees – Index tracker funds are almost always passively managed. Lower management fees come with a smaller expense ratio and, subsequently, deal less damage to total investment returns. Investing through an index fund is also typically more cost-effective than buying shares of each individual stock in an index.

Disadvantages of investing in the Dow Jones

While the Dow Jones Industrial Average offers many significant advantages, it also has some drawbacks that investors need to consider.

• Limited Growth – As the index contains solely defensive stocks, it has historically underperformed versus the S&P 500 index by a significant margin. On an annualised basis, the Dow Jones has generated an average return of 5.03% since its inception versus the S&P 500’s 10.2%.
• No Control – Index tracker funds do not have a stock selection criteria beyond a business being a constituent of the index being tracked. As such, it’s possible for investors to indirectly own shares in companies that may not align with their ethical or moral values. For example, there are several tobacco stocks within the Dow Jones. However, there is no way to avoid these businesses when buying shares in an index fund.

Can I lose money by investing in the Dow Jones?

Despite the Dow Jones only containing large and mature businesses, investors are still exposed to risk. Regardless of size, companies are always under threat of disruption, whether from internal or external forces such as industry, geopolitical, or monetary policy fluctuations.

The valuations of the underlying businesses drive the price level of the Dow Jones index. Therefore, if its constituents see diminishing earnings, the index suffers. All of this is to say yes, investors can still lose money by investing in a defensive index like the Dow Jones Industrial Average.

Top 10 Dow Jones stocks

Below are the top 10 Dow Jones stocks in order of share price and, therefore, weighting as of 27 January 2023.

Related: Complete list of all Dow Jones stocks

Alternatives to the Dow Jones

The Dow Jones Industrial Average is not the only stock market index investors can choose to track. Some alternatives include:

• S&P 500 – This stock market index tracks the performance of a total of 500 large companies listed on stock exchanges in the United States.
• FTSE 100 – The stock market index tracks the performance of the largest 100 UK stocks by market cap.
• FTSE 250 – This stock market index tracks the performance of the 101^st to the 250^th largest UK stocks by market cap.
• FTSE AIM 100 – This index includes the largest 100 UK stocks by market capitalisation, which have their primary listing on the Alternative Investment Market (AIM).

The bottom line

Investing in an index fund that tracks the Dow Jones is a popular decision by many investors across all levels of experience. But in particular, for beginners, this strategy can be a sensible way to get started on an investing journey due to its simplicity.

Of course, index tracking isn’t suitable for everyone. And whether or not investing in the Dow Jones is a good idea ultimately depends on personal risk tolerance, investment goals, and time horizon.

This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.