Dow Diamonds

Nearly everyone can appreciate diamonds. They're rare, and they can be valuable too. The same can be said for the companies in the Dow Diamonds. If you ever wondered what it would be like to own the Dow Jones Industrial Average, we have good news for you. That's the purpose of the Dow Diamonds.

Dow Jones Diamonds

When investors talk about blue chip stocks, the companies appearing in the Dow Jones Industrial Average always seem to weave their way into the conversation.  But is it possible to really "own the Dow" without spending a lot of money creating your own portfolio of these stocks?

That's exactly where the Dow Diamonds come into play.  Basically, the Dow Diamonds is an exchange traded fund that attempts to mirror the performance of the DJIA.  The fund's name is SPDR Dow Jones Industrial Average ETF, and its stock ticker is DIA.  The Dow Diamonds trade on the New York Stock Exchange.

Advantages of Owning Dow Diamonds

As previously mentioned, one of the biggest advantages of owning the Dow Diamonds is that you instantly have a portfolio of stocks.  These stocks are like the ones you'd find in a mutual fund or index fund.  However, because the Dow Diamonds is an exchange traded fund, you can trade shares in the Diamonds just like you trade shares of common stock.

Furthermore, because you're able to buy this pre-packaged bundle of the DJIA, it's a very efficient way to diversify away the risk you have when buying stock in just one company.  With the Diamonds, you have the same exact 30 large cap stocks in the same price weighted average you'd find in the DJIA index.

The fund itself is run in a very efficient manner.  The expense ratio is close to 0.2%, and you can buy just one share if that's all you want.  Stock dividends from any of the companies in the Dow Diamonds are paid to shareholders on a monthly basis.  Most brokerage houses allow investors to automatically reinvest any dividends paid right back into the fund.

Trading Dow Diamonds

Because the Dow Diamonds are an ETF, you can trade in the Diamonds anytime the stock exchange is open for trading.  In addition, with the Dow Diamonds, the investor can enjoy the following trading options:

Buying Diamonds on Margin

Investors can buy the Dow Diamonds on margin accounts, which work the exact same way as with common stocks.  If you have not traded on margin before, you should consult with a stockbroker to make sure you understand the rules and obligations.  For example, if the price of the Dow Diamonds should decline, you may need to deposit more money into your margin account.

Short Selling Diamonds

Just like with stocks, you can sell the Diamonds short on any price movement, and at any time during the trading day.  Once again, you will probably need to speak with a broker about margin requirements, and you will need to borrow, or buy, these securities before selling short.

Long and Short Term Performance Measures

The following table contains the long and short-term performance data for the Dow Diamonds as of June 2011, stated in terms of its annual pre-tax returns:

Dow Diamonds:  Annual Returns

As you can see from the above table, the Diamond's performance has been moderate over the last ten years.

Diamonds versus Dogs

If you're intrigued by the companies comprising the Dow Jones Industrials, then your investment option is not limited to the Dow Diamonds.  You can also buy the Dogs of the Dow.  In case you have not heard of the Dogs of the Dow before, here is a quick primer.

The theory behind the Dogs of the Dow is fairly straightforward.  The stocks in the Dow are sorted to find the ten companies with the highest dividend yield.  By doing so, you are automatically choosing companies that are undervalued relative to their peers.  Each year you are refreshing the list.  So you're always picking new "dogs" annually.  If you'd like to find out more about this alternative to the Dow Diamonds, take a look at our article on the Dogs of the Dow.

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