Forget the Dow Jones — Buy This Magnificent ETF Instead

The Dow Jones Industrial Average (^DJI 0.20%) index is a popular market tracker. Lots of investors follow what’s going on with the Dow on a daily basis, and many invest in it through the SPDR Dow Jones Industrial Average ETF Trust — the only exchange-traded fund (ETF) that reflects this index.

The Dow mirrors the performance of 30 hand-picked business titans headquartered in the U.S., and it’s a privilege to be included in this elite group. These stocks are leaders in their industries, providing a robust gauge of market trends and economic strength. The American economy tends to be healthy when the Dow is doing well.

But what if I told you that you could invest in large-cap U.S. stocks with a constant focus on undervalued giants with a different exchange-traded fund (ETF)?

While the Dow has its merits, there’s another option worth considering. This ETF can match the Dow’s long-term returns and challenge its focus on quality stocks. That’s what you’ll get with the Vanguard Value Index Fund ETF (VTV 0.34%).

What is the Vanguard Value ETF?

I’m talking about an index ETF from Vanguard, the money-managing brainchild of genius investor John Bogle. As usual, the fund leaves the stock-picking work to others in order to deliver a high-quality product with microscopically low management fees.

The Value ETF mirrors the CRSP U.S. Large Cap Value index and is the only ETF that follows this exact strategy today. Managed by an arm of the University of Chicago, this index currently points to 342 stocks in the large-cap value category.

The fine folks at Vanguard can wait for the CRSP Center’s quarterly reports with folded arms, since this fund simply applies the updated stock weights with a high degree of automation. In reality, they probably keep in touch with the index people and contribute to the work in many ways. But the research would be done even if Vanguard never lifted a finger to help.

Key features of the Vanguard fund

ETFs typically weight their holdings by stock price (like the Dow) or by market cap (like the S&P 500 index), but this CRSP index is different. The CRSP Center runs the numbers across all large-cap stocks, using its own screening tools and analysis to assign more weight to undervalued securities. You won’t find the usual suspects among the top 10 holdings in the latest report.

Skipping over high-flying stocks with lofty valuations such as Nvidia and Microsoft, this index prefers Warren Buffett’s Berkshire Hathaway, semiconductor veteran Broadcom, and megabank JPMorgan Chase. Their presence at the top of this index list could be a great starting point for further value-chasing research if you’re interested in individual value stocks.

The average market cap across these 342 stock tickers was $61.6 billion at the end of March, when this quarterly report was published. That’s more than the three smallest names in the Dow Jones Industrial Average, suggesting that a large number of Vanguard Value ETF members might qualify for the Dow, as well.

How the Value ETF stacks up against the Dow

The Value ETF can match wits with the Dow in terms of member size, business quality, or all-American grit and success. But that’s not the whole story.

• The Value ETF comes with a 0.04% annual expense ratio, well below the only Dow tracker’s 0.16% fees.
• You’ll be happier with the Vanguard Value ETF if you’re looking for solid dividend yields from your large-cap stock vehicle. It offers an annual yield of 2.5%, comfortably above the Dow’s 1.8%.
• Once again, the Dow’s 30 stocks can’t hold a candle to the diversification of 342 names. The Dow Jones Industrials index is inherently riskier and more volatile than the broader CRSP index and Vanguard fund.

While the Dow Jones Industrial Average has been a relevant and popular market tracker since 1896, offering a helpful snapshot of America’s top companies, the index isn’t perfect for every situation. The Vanguard Value ETF provides quite a compelling alternative in many ways.

Both focus on large, high-quality U.S. stocks, but the Vanguard fund offers broader diversification with 342 stocks, a significantly lower expense ratio, and higher dividend yields. All respect to the Dow, but you may find the Vanguard Value ETF approach to be a better fit with your investment goals.