The Dow Jones Industrial Average has 30 stocks in it. It would be expensive if you bought all 30 of these stocks yourself. You can buy a mutual fund that owns all the Dow stocks, and you can put in as little as $500 or $1,000. You might think it wouldn't make any difference which fund you buy if they all own the same 30 stocks, but there actually is a difference.
Funds that Double the Dow
When mutual funds want to outperform the Dow, they must invest in a special way. The DJIA is "weighted." That means some stocks count more than others when figuring the average performance. You don't have to worry about the complicated formulas for this weighting. Just realize that funds that try to perform twice as well as the Dow invest in a way that emphasizes the weighting even more than the index itself does. They invest more in the heavier-weighted stocks and less in the others. Keep in mind that a fund that tries to outperform the Dow by doing twice as well can also go down twice as far when the Dow drops.
Tracking the Dow
It's less risky to merely keep up with the Dow instead of trying to outperform it, because the fund won't have to invest as much in the heavily weighted stocks. To track the Dow as of the date of publication you must step outside of mutual funds just slightly to exchange-traded funds, because no current mutual fund tracks this index. ETFs are very similar to mutual funds, except you can trade them on the stock exchange just like stocks. ETFs that track the Dow include the ProShares Ultra Dow30.
Shorting the Dow
There's a concept called "shorting." This means investing in such a way that if stocks go down, you make money. The way you do it with an individual stock is a little complicated, but you can get around that by purchasing a mutual fund that does it for you. Mutual funds that short the Dow include the Rydex Inverse. These funds are invested in such a way that if, for example, the Dow drops by 20 percent, your investment will go up by 40 percent.
Changes in the Dow
You may lose money when a stock gets taken out of the Dow. This happens periodically as stocks gain and lose their appeal to investors. The editors of the "Wall Street Journal" vote on which stocks stay in the index and which ones get removed, and they establish and announce a date for any removal. Until that date, index funds must continue to sell a stock targeted for removal because they are committed to holding the Dow's stocks. Investors often rush to sell the stock before the deadline. They know that mutual funds hold millions of shares, and when they dump their shares on the market, the price of the stock will very likely go down sharply, because very few buyers will want to buy it. Your Dow index fund could lose money because of this selling.
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