This Top Dow ETF Is Crushing the Nasdaq and the S&P 500 Over the Last Month. Here’s What That Means for the Market Rally.

The Dow Jones Industrial Average, more than 125 years old, is one of the major U.S. stock market indexes. And although it contains just 30 components — compared to hundreds for the S&P 500 and thousands for the Nasdaq Composite — the Dow is still seen as a good benchmark for the broader market, especially through the lens of blue chip companies.

The Dow is up nearly 4% in the last month compared to just a 1.9% gain in the S&P 500 and a 1.3% gain in the Nasdaq Composite. Here’s what that means for the broader market rally, along with a low-cost exchange-traded fund (ETF) worth considering if you want to invest in the Dow.

Dissecting the Dow, S&P 500, and Nasdaq Composite

The Dow has become more growth-focused recently with the addition of Amazon in 2024 and Salesforce in 2020, but it is still centered around value and income. The S&P 500 balances growth, value, and income; nearly half of the Nasdaq Composite is in the technology sector.

The indexes can have noticeably different performances because of their sector weightings. The Dow, for example, has higher weightings in financials, healthcare, consumer discretionary, and industrials than the S&P 500 and Nasdaq Composite, but lower weightings in high-growth sectors like tech and communications (with the latter including Alphabet, Meta Platforms, Netflix, and other growth stocks).

Data sources: State Street Global Advisors,S&P Global, Fidelity.

Due to its composition, the Dow tends to have a lower valuation and a higher yield. The SPDR Dow Industrial Average ETF (DIA 0.34%) — which closely resembles the performance of the Dow — has a price-to-earnings (P/E) ratio of 23.3 and a yield of 1.8% compared to a 26.2 P/E and a 1.3% yield for the SPDR S&P 500 ETF (NYSEMKT: SPY) and a 36.1 P/E and a 0.6% yield for the Invesco QQQ (NASDAQ: QQQ). The Invesco fund mirrors the performance of the Nasdaq-100, which is a market-cap-weighted index for the 100 largest nonfinancial components in the Nasdaq Composite.

Reading the tea leaves

When the Dow is outperforming the S&P 500 and Nasdaq Composite, that usually means that investors are getting more defensive and shifting to lower-risk sectors. The market rally over the last seven months or so has certainly been led by big-tech growth stocks.

But recently, safer sectors have begun to outperform growth. It might surprise you to learn that the financials, industrial, consumer staples, materials, and utilities sectors are all within less than 1.5% of their 52-week highs.

The year 2022 is a great example of a terrible period in the market when the Dow went down, but significantly outperformed the S&P 500 and Nasdaq Composite.

^DJI data by YCharts.

This year is different because the S&P 500 and Nasdaq Composite were first to move toward all-time highs, while the Dow had to play catch-up.

Normally, a big shift away from growth toward value and income can seem bearish, but in this case, it looks more like the market rally is broadening beyond big tech and into other sectors that were lagging behind.

The following chart shows that the Dow is still underperforming the Nasdaq Composite and S&P 500 over the last year, but it has still put up impressive gains.

^DJI data by YCharts.

For context, the S&P 500 has achieved annualized gains of 9% to 10% over the long term. So even 18% for the Dow is an outlier performance.

A low-cost way to invest in the Dow

The SPDR Dow Industrial Average ETF is the simplest and best way to invest in the Dow. The expense ratio is a reasonable 0.16%, and it has over $31 billion in net assets, making it one of the largest Dow ETFs. The fund has been around since 1998, giving it a long track record and an element of trustworthiness compared to younger ETFs.

A Dow ETF could be a good fit for investors looking to increase their allocation in blue chip stocks. The Dow has a value and income reputation, but it also has quite a bit of growth. As mentioned, Amazon and Salesforce were added to the Dow within the last five years, and Microsoft and Apple are also part of it. Most Dow components are industry-leading companies that are good starter stocks, especially for sectors you might be underweight in.

Diverting new savings into a Dow ETF could be a good way to rebalance your portfolio without selling winning stocks. When a certain category of stocks, like big tech, outperforms the market in a big way, it’s easy for a portfolio to suddenly become way more growth-focused than originally intended.

The simplest way to fix that is to sell a piece of a winning position and rebalance into something else. But that’s not a good idea if an investment thesis is still strong. Therefore, a better solution is to deploy new savings toward safer pockets of the market. That way, you can let your winners run while also shifting the balance of your portfolio.

Use market dynamics to your advantage

Knowing what is driving the market can help you make informed investment decisions. But jumping into whatever is working over the short term and out of what isn’t working is an overly complicated strategy that can do more harm than good.

The Dow outperforming the S&P 500 and Nasdaq Composite can sometimes be a bearish signal that investors are getting defensive. However, given the strong performance of cyclical sectors like industrials, materials, and energy, it looks like the rally is actually getting healthier. This doesn’t mean you should dive headfirst and ride the rally higher — but it is a good sign that the bull market has more room to run.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, S&P Global, and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.