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Dow Jones Hits 12th Session of Record High: ETFs in Focus

Zacks Equity Research

Gaining 0.1% on Monday, the blue chip index Dow Jones achieved its 12thstraight high, coming close to the 1987 winning streak of thirteen sessions of record closes, according to the Dow Jones Market Data Group.

Since the surprise victory of Donald Trump, there is growing optimism in the market, owing to his promised policies. Higher infrastructural spending, lower tax rates and reduced regulations on banks by modifying the Dodd Frank Act are some of the factors that have induced confidence (read: Trump Tax Talk Boosts Market: Time for Momentum ETFs?).

The Dow Jones has increased more than 13% since President Trump was elected. Dow Jones is a price weighted index, meaning that stocks with higher prices dominate the index (read: Dow ETF Tops Asset Flow: 5 Stocks behind the Surge).

The rally proved to be really kind to the CEOs of the component companies, raking in a gain of around $400 million collectively. Goldman Sachs (GS) is currently the priciest stock in the index and has gained more than 30% since President Trump was elected.

Among other winners, JP Morgan Chase (JPM) also gained close to 30% over the same time frame. President Trump’s pro-business outlook and proposed ripping up of financial regulations primarily backed the rally (read: Trump Loving ETFs & Stocks for Valentine's Day).

Considering the current scenario and price trends, we have selected the following ETFs, which are either tracking the DOW or are heavily invested in the DOW component winners.

SPDR Dow Jones Industrial Average ETF (DIA):

This ETF tracks the Dow Jones Industrial Average. It has an AUM of $14.7 billion with an annual expense ratio of just 17 bps. Sector wise, Financial Services and Industrials have the highest allocation (20% each), attributable to President Trump’s pro-business outlook. Goldman Sachs comprises about 7.9% of the fund, and is currently winning due to the Trump rally (up about 30% since the election).

This fund comprises the safest investments in the country as its main focus is on large cap and mega cap stocks. However, the tradeoff is that these companies have matured and hence won’t grow as much as their mid- or small-cap counterparts. The fund provided a year-to-date return of 5.66% and a one-year return of 27.7%. The fund has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Now that we have talked about DIA, we can now move to sector specific ETFs that may stand to benefit from the rally of individual DOW stocks.

Industrial Select Sector SPDR Fund (XLI): This ETF offers exposure to the US Industrials sector, to which investors currently have a bullish outlook because of President Trump’s proposed policies.

The fund’s top sector allocation is Industrials (95%) with a 9.3% allocation to General Electric. The fund has an AUM of $10.17 billion with a low expense ratio of just about 15 bps. The fund provided a year-to-date return of 5.90% and a one-year return of 28.61%. The fund has a Zacks Rank #2 (Buy) with a Medium risk outlook.

Vanguard Financials ETF (VFH): This ETF offers exposure to the US Financial Services sector, to which investors currently have a bullish outlook because of President Trump’s promise to cut down on banking regulations and ease stringent banking rules.

The fund’s top sector allocation is Financial Services (96%) with an 8.82% allocation to JP Morgan Chase (up about 30% since the election). The fund has an AUM of $4.85 billion with a low expense ratio of just about 12 bps. The fund provided a year-to-date return of 4.90% and a one-year return of 45.98%. The fund has a Zacks Rank #1 (Strong Buy) with a Medium risk outlook (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).

Bottom Line

The Dow hit its longest winning streak in 30 years ahead of President Trump’s speech. His promises on higher infrastructure spending and reduced regulations for Wall Street make us look focus on sector specific ETFs as good investments.

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J P Morgan Chase & Co (JPM): Free Stock Analysis Report
 
Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report
 
SPDR-DJ IND AVG (DIA): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
VIPERS-FINANCL (VFH): ETF Research Reports
 
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