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Can Dow ETFs Be a Winner in 2020?

Sanghamitra Saha

The Dow Jones industrial average is up 19.6% this year (as of Dec 9, 2019), thanks to a dovish Fed and occasional cues of improvement in the U.S.-China trade relation. However, the index has still underperformed its other two cousins – the S&P 500 (up 24.9%) and the Nasdaq (up 29.3%).

However, as the 2020 is about to begin, some economic and political factors look more favorable for the Dow Jones. Investors should note that SPDR Dow Jones Industrial Average ETF DIA has a Zacks Rank #1 (Strong Buy).

Let’s take a look at the factors that can drive a 2020 rally for Dow Jones ETFs.

U.S.-China Trade Optimism

The Dow Jones is about to gain from trade optimism as U.S.-China trade talks are highly related to the manufacturing sector and exports. The deadline for the interim “phase one” deal between the U.S. and China is approaching fast. New tariffs on smartphones, laptops and toys imported from China will be enacted on Sunday, Dec 15, unless a deal is cracked. In such a scenario, U.S. President Donald Trump commented that trade talks with China were going well, which is a positive for the markets and especially Dow Jones (read: Is Trade Scaring You? ETF Strategies for 2019 Holiday Season).

Focus on Blue-Chip Stocks

The Dow Jones assigns greater weight to higher-priced stocks, which is one of the reasons behind the recent surge. Overall, blue chip stocks are performing exceptionally of late. Also, large-cap stocks have substantial foreign exposure and thus perform better in a weaker dollar environment — like what we are witnessing now thanks to a dovish Fed.Now, since the Dow Jones is a price-weighted index, bullishness over this high-priced, large-cap cohort has made the case for the Dow investing more appealing.

Boeing’s Expected Price Gains

Boeing holds 8.56% of the fund DIA, securing the top spot. So, the company’s performance matters a lot. Its stock is up only 8.5% this year (as of Dec 9, 2019), having suffered a lot due to its 737 MAX jetliner. The cost of grounding 737 MAX after two fatal crashes continues to go up. However, the company still hopes to get regulatory approval soon, despite the delay so far. If the issue gets resolved, Boeing shares may go higher.

Oil Rally

Furthermore, it has been noticed lately that the Dow Jones shares a deep relationship with oil price movement. Though the energy sector rally has spread optimism in the broader market as a whole, in most cases, on a particular day of oil surge, the spurt in the Dow Jones is steeper than that of the S&P 500, or vice versa (read: More OPEC Output Cut in the Cards? Energy ETFs in Focus).

Oil prices made a comeback recently, buoyed by the OPEC output cut, U.S. sanctions against Venezuela on political ground and U.S.-Sino trade deal hopes. United States Oil Fund LP (USOadded about 3.7% in the past month while United States Brent Oil Fund LP BNO has advanced about 4.7% this year (as of Dec 9, 2019).

Compelling Valuation

Since the start of the fourth quarter, Wall Street has been on an uptrend. But Dow Jones has lagged its S&P 500 and Nasdaq counterparts. This makes its valuation cheaper. So, many investors may be interested to dig into the weaker valuation to head into 2020. Per the Economy Forecast Agency, the Dow Jones is likely to hit 31,296 by the end of 2020, marking around 11% gain.

ETFs in Focus

Therefore, investors seeking a momentum play, can bet on SPDR Dow Jones Industrial Average ETF DIA, Guggenheim Dow Jones Industrial Average Dividend ETF (DJDand iShares Dow Jones US ETF (IYY). Investors can also settle for leveraged Dow ETF plays as long as the trend favors them. Here, ProShares Ultra Dow30 (DDMand ProShares UltraPro Dow30 (UDOWare a couple of choices.

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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
 
United States Oil Fund, LP (USO): ETF Research Reports
 
United States Brent Oil Fund LP (BNO): ETF Research Reports
 
ProShares UltraPro Dow30 (UDOW): ETF Research Reports
 
Proshares Ultra Dow30 (DDM): ETF Research Reports
 
Invesco Dow Jones Industrial Average Dividend ETF (DJD): ETF Research Reports
 
iShares Dow Jones U.S. ETF (IYY): ETF Research Reports
 
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