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 Nearly everyone can appreciate diamonds. They're rare, and they can be valuable. And the same can be said for the companies in the Dow Diamonds. If you've ever wondered what it would be like to own the Dow Jones Industrial Average - then we've got good news for you. That's just what the Dow Diamonds are all about.
Dow Jones Diamonds
When most investors talk about blue chip stocks, the companies appearing in the Dow Jones Industrial Average somehow always 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 DJIA. Technically the fund's name is DIAMONDs Trust and its stock ticker is DIA. DIAMONDS Trust trades on the American Stock Exchange.
Advantages of Owning Dow Diamonds
As previously mentioned, one of the biggest advantages of owning the Dow Diamonds is that you've instantly got a portfolio of stocks like 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'd have by buying stock in just one company. With the Diamonds, you've got the same exact 30 large cap stocks in the same price weighted average you'd find in the DJIA index itself.
The fund itself is run in a very efficient manner, with an expense ratio of only 0.17%, 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
And 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've never traded on margin before, you should consult with a stock broker to make sure you understand all the rules. 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 performance data for the Dow Diamonds as of November 2007, stated in terms of the cumulative and annual pre-tax returns:
Dow Diamonds - Cumulative and Annual Returns
| |
12 Month |
3 Year |
5 Year |
Since Inception |
| Cumulative Return |
17.05% |
49.05% |
85.96% |
100.40% |
| Annualized Return |
17.05% |
14.23% |
13.21% |
7.81% |
As you can see from the above table, the Diamonds performance has been pretty good. In fact, it has tracked the Dow extremely well and outpaced the S&P 500 in terms of total cumulative return in a five year timeframe.
Diamonds versus Dogs
If you're intrigued by the companies comprising the Dow Jones Industrials, your investment option is not limited to the Dow Diamonds - you can also buy the Dogs of the Dow. In case you've never heard of the Dogs of the Dow, here is a quick primer.
The theory behind the Dogs of the Dow is really quite simple. 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." 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.
About the Author - Dow Diamonds
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