Dow Jones Index Fund | DJIA Fund | Smart Investing Strategy

A Dow Jones index fund is a mutual fund or exchange-traded fund (ETF) that comprises stocks from companies that make up the Dow Jones Industrial Average.

There are major advantages to an investment strategy that includes a Dow Jones index fund. First of all, this method reduces long term risks of investing in the stock market.

Investors who invest in a Dow Jones index fund believe that no one can beat the market averages over a long period of time. Therefore they believe that investing along with the market averages will yield you a better return. This is also known as index investing.

In addition, index investing with a Dow Jones index fund, or any index fund for that matter, will reduce management fees that can really eat into your portfolio. Both of these benefits can increase your return dramatically over time.

There are other index funds that is comprised of stocks and other financial securities from other indices like the S&P 500 and NASDAQ.

Index investing can be a way to diversify your investment portfolio and be one of the safer investment vehicles in your portfolio management strategy. You can also use it to compare the relative progress of your other investments in your portfolio.

Index Fund Explained

We've already mentioned that a Dow Jones index fund invests in the 30 companies that make up the Dow Jones Industrial Average (DJIA).

Although this may seem like a boring way to invest, research has shown that over time, this may be the best way to invest in the stock market.

There are other index funds out there like the S&P 500 index fund which tracks the 500 companies in the S&P 500. As well, there are funds like a NASDAQ index fund which tracks companies that are traded on the NASDAQ.

Dow Jones Industrial Average

The reason it's smart to invest along the Dow Jones Industrial Average is because it has risen steadily over time since it's creation in 1896. Putting money on the DJIA has proven to be a safe bet over time.

It started out as 12 companies, but has grown in encompass 30 blue chip companies. These companies are chosen because there are thought to be large, influential public companies that are indicators and represent how the stock market it doing overall. These companies are blue chips, which mean they are large and very low risk investments.

And although they don't grow as fast as a hot penny stock, they have proven to grow steadily but surely over time. That is why it is a safe investment to put your money into a Dow Jones Index Fund.

Management Fee Advantage

Index funds are a lot less costly to manage. There are two types of mutual funds, those that are actively managed and those that are passively managed. A Dow Jones index fund is passively managed.

It's passively managed because it follows a preset group of companies and all they have to do is figure out how much they will weigh each stock among the 30.

In contrast, actively managed mutual funds take a lot more work in addition to it being a lot more risk. The assumption in an actively managed mutual fund is that the money manager has some sort of secret knowledge about companies and stocks that have higher growth potentials.

Of course, if you ask them, they will all say that they do. And in fact some do, but what research has shown is that most don't.

Even still, the process of finding those gem stocks, managing how much stock to buy and sell on a daily basis, and all the other little things a actively managed money manager must do all adds up to much higher management fees than an index fund.

On average, the management fee for an actively managed mutual fund will run you around 1.5%. In contrast, an index fund that follows the Dow Jones Industrial Average may run as low as .1%. Over time, assuming that all returns are the same, which it unlikely, the index fund will yield you a better return on investment.

Companies With Index Funds

There are many great companies that offer index funds. Some of the best are the Vanguard index funds which have a long and great reputation for offering consistent and positive returns.

iShares Dow Jones Index Fund is a fund offered by BlackRock Fund Advisers. It was formerly offered by Barclays Global which was acquired by BlackRock in January 2010.

The BlackRock acquisition of Barclays Global is an interesting story. BlackRock was previously an investment advisory firm that only offered actively managed funds.

When they acquired Barclays Global, they also inherited over $1 trillion in passively managed funds like the iShares Index Funds. Now they have two opposite trading methods under one roof.

There is also an ETF traded on the American Stock Exchange call the Dow Diamond that is also a Dow Jones Index Fund that you can invest in.

Rational Investing

This is not to say that everyone everywhere should only do index trading. But if you think that you or your money manager has some sort of advantage or skill that can beat the market over time, you would statistically wrong.

I forgot who did this study or even if it's true. It may just be an urban legend. But I recall a study where they pitted monkeys throwing darts at a stock page in the newspaper against money managers of actively managed funds and the monkeys won.

I'd like to include one note about investing in a Dow Jones index fund. As we've already stated, these index funds follow the 30 blue chip companies in the Dow Jones Industrial Average.

That means investing in these funds are generally going to be safe. It will not be as volatile or as risky as investing in other financial products.

But I should note that many investors are increasingly going with S&P 500 index funds because they feel like it better represents the economy as a whole. Because there are many more good companies in the S&P 500, investors feel like this makes it an even better investment tool than the Dow Jones index funds for the same reasons that the Dow funds are good investments.

Investing Alternatives

If you're looking for higher returns, higher risk and a little more excitement in your investing life, there are two other options you can consider.  First there is doing investment properties as a business.  It requires a lot of work and dealing with people, but it can also be very lucrative.

In addition, you can also look at the life insurance settlement industry and invest in life policies.  It's a little bit of a morbid sector, but it can be very lucrative.  It's also a nice win-win for both you the investor and the policyholder.