The Dow Jones Industrial Average achieved a new all-time high close of 37,557.92 on Dec. 19. Despite the impressive return, the Dow is still underperforming the Nasdaq Composite and the S&P 500 year to date. The Dow has also underperformed the other two major indexes over the last five-year and 10-year time periods.
Here's why the Dow could beat the Nasdaq in 2024, and why the index is a treasure trove of growth, value, and income.
Image source: Getty Images.
The Dow often lags during outperforming years
The Nasdaq has beat the Dow in eight of the last 10 years.
|
Index |
2023 Year-to-Date |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
|---|---|---|---|---|---|---|---|---|---|---|
|
Nasdaq Composite |
43.3% |
(33.1%) |
21.4% |
43.6% |
35.2% |
(3.9%) |
28.2% |
7.5% |
5.7% |
13.4% |
|
Dow Jones Industrial Average |
12.8% |
(8.8%) |
18.7% |
7.3% |
22.3% |
(5.6%) |
25.1% |
13.4% |
(2.2%) |
7.5% |
Data source: YCharts. YTD as of Dec. 22.
In general, the Dow has underperformed during strong years in the stock market because the Dow has a higher focus on value and income, whereas the Nasdaq Composite focuses less on value and income. If the market is doing well, that probably means investors are willing to take on more risk, pay a higher price for growth, and gravitate toward Nasdaq stocks.
If you think about the industries that have contributed to economic growth over the last decade, a lot of them are tech-related. The mobile phone is a great example. Just think about how much phones have evolved and all the industries and companies that have benefited. Or e-commerce, streaming, cybersecurity, cloud and software infrastructure, semiconductor innovations, mobile banking, electric vehicles, the energy transition, and more. These are just some of the trends that have driven growth in the Nasdaq more than the Dow.
Why the Dow is a great value
If the Nasdaq is where it's at in terms of megatrends, then you may be wondering why the Dow is appealing. Well, for starters, the Dow is a great value.
One of the largest Dow exchange-traded funds (ETFs), the SPDR Dow Jones Industrial Average Trust (DIA -0.74%), has an average component price-to-earnings ratio of 22.1. That's compared to 33.3 for the Invesco QQQ Trust (QQQ -1.33%), an ETF that mirrors the performance of the 100 largest Nasdaq stocks.
The stark contrast in valuation shows that premium investors are willing to pay for growth right now. And it also shows that, despite a strong year-to-date return for the Dow, the index is still a fairly good price. The Invesco QQQ Trust's expensive multiple shows that investors are banking on future earnings, not present earnings. And because of that, Nasdaq stock prices have grown at a faster rate than earnings.
By comparison, many companies in the Dow already make money. So, they are more valued for their present earnings rather than what they could make in the distant future. The tech companies in the Dow -- Apple, Microsoft, Cisco Systems, International Business Machines, Intel, and Salesforce -- are all proven businesses and leaders in their fields.
A lot of Dow stocks have inexpensive valuations relative to the market. Slow-growing Dow companies like Procter & Gamble, McDonald's, and Walmart aren't going to wow you with their growth. But they will hold up extremely well during an economic downturn while supporting reliable dividend growth.
It's not like the Dow doesn't have any growth prospects. It just has a different focus than the Nasdaq or S&P 500.
The best way to invest in the Dow in 2024
With just a 0.16% expense ratio, the Dow ETF Trust provides a simple way of investing in the Dow. But an even better approach may be to use the Dow as a starting point to find companies that fit your investment objectives.
For example, if you're looking for value and income over growth, you may not want to invest in a company like Salesforce at all. If you do want some growth and are willing to take on more risk, you may want to avoid stocks like Verizon Communications and Walgreens Boots Alliance. Instead of buying a Dow ETF, you can pick your 10 favorite Dow stocks and buy a share of each to create your own mini Dow portfolio.
Betting on the Dow
A bet on the Dow over the Nasdaq is a bet on proven strength and stability instead of potential growth. If the stock market cools off in 2024, or if valuations come down after this year's epic run, or if some uncertain risk comes to light that scares the market, then chances are the Dow will outperform the Nasdaq.
The Dow is worth a closer look for risk-averse investors or anyone who wants a less expensive opportunity in today's market.
