Only three mutual funds track the Dow Jones Industrial Average while 118 funds track the S&P 500, according to Lipper of Summit, N.J. However, because the change in the Dow index that took effect Nov. 1 is likely to greatly improve its performance, a number of mutual fund companies might bring Dow Jones index funds to market, according to portfolio managers and researchers.
To better reflect today's economy, Dow Jones & Co. decided to drop Goodyear Tire, Sears, Chevron and Union Carbide from the Dow Jones Industrial Average and replace them with Microsoft, Intel, SBC Telecommunications and Home Depot.
The four stocks being added have had an average five-year earnings growth of 26 percent versus only five percent for the stocks they are replacing, said Chuck Carlson, co-portfolio manager of the Dow 30 Value Fund, managed by Strong Equity Funds of Milwaukee, Wis.
"These changes have boosted the long-term earnings growth potential of the Dow pretty dramatically," said Carlson. "It wouldn't surprise me if other Dow index funds are brought to market. If performance is there, product will develop."
One reason there are only three Dow Jones index funds on the market is that the index has not performed as well as the S&P 500, Carlson said. But the major reason is that Dow Jones did not start allowing fund companies to license the index until 1997, he said. With these recent changes to the makeup of the average, the number of funds tied to the Dow Jones Industrial Average could very likely increase, he said.
Strong's Dow 30 Fund was the first Dow Jones index fund created and, therefore, the only one with full-year 1998 performance figures. Strong's Dow 30 Fund is up 15.92 percent year-to-date as of Oct. 28, according to Lipper. By comparison, the S&P 500 was up 10.35 percent in the same period, according to Lipper. In 1998, however, the S&P 500 rose 28.8 percent, outpacing the 16.11 percent growth of Strong's Dow 30 Fund, according to Lipper.
"If you see this kind of out-performance [by the Dow over the S&P 500] continue, then people will start to look at the Dow as a viable alternative," Carlson said.
An improvement to the Dow Jones Industrial Average could also raise investors' expectations, said Russ Kinnel, director of mutual fund research at Morningstar.
"This change will have great psychological impact on investors" and could raise their performance expectations to unrealistically high levels, Kinnel said.
John W. Davidson, chief investment officer at Orbitex Funds of New York, believes Dow Jones' change to the average brings it up to date. Orbitex runs the Orbitex Focus 30 Fund, which is not a true Dow Jones index fund, but is heavily influenced by it.