samxmeg
In my recent article discussing my thoughts for 2024, one detail that could have easily been missed is one that the first week of January may already be pointing to. Specifically, while nothing in investing is a sure thing (except volatility and being wrong a lot, I know!), I think that the Dow Jones Industrial Average, which is tracked by the SPDR Dow Jones ETF (NYSEARCA:DIA), is more likely to outperform both the S&P 500 and the Nasdaq 100 and their associated ETFs like SPY, VOO, IVV, QQQ and others.
My rationale is a combination of fundamental, quantitative and technical factors, as described below. But the takeaway is this: the Dow, a collection of tenured businesses with rich histories of strong management and sustainability of profits and revenue, will likely benefit from a so-called relative “flight to quality” in 2024 and perhaps a year or so beyond that. The Magnificent 7, which actually includes 2 DIA components (AAPL and MSFT), are likely over their skis after such a powerful 2023 rally, and their current lofty price levels assume operating perfection for years to come.
And so this creates an intriguing case of “perfect being the enemy of the good.” And while DIA may not rival the type of returns that SPY and QQQ have posted in their best recent calendar years, this is a year in which many of 2023’s market risk factors are far enough along to make US stock more vulnerable than in some time. I rate DIA a Buy, but with my usual disclaimer that my ratings on equity ETFs like this one are relative to SPY. And when I rate SPY (and only SPY), I am expressing my opinion on the broader market.
In other words, my sell rating on SPY says that I think the US stock market reward potential, while always present, is dwarfed by the level of risk. That could bring some amazingly high returns this year, but it won’t remove my belief that those returns were earned despite taking a lot of risks. Think 3-point shot in basketball versus foul line jump shot. And, the odds favor DIA outperforming SPY, and QQQ.
Re-connecting with the good old Dow and DIA
With SPY and QQQ and even TLT grabbing the hearts and minds of investors in 2023, let’s not forget the somewhat ancient, quirky-weighted, but effectively collection of 30 stocks known as DIA. The ETF is now more than 25 years old, and has attracted $32 billion in assets. So I guess I’m not the only Dow-watcher left.
Your typical ETF geek will tell investors that 30 stocks is too few, especially when 58% of DIA is made up of just 10 stocks and 25 account for 96% of total holdings. To me, equity ETFs are baskets of stocks that I use as a piece of a bigger puzzle, and I want to know and track what I own. Try doing that with 400 stocks in a single ETF that accounts for a modest part of a portfolio. I’ve tried it, and it is counterproductive.
From a valuation standpoint, the Dow enters 2024 with a trailing P/E of 21, the Dow is not super-cheap by any means. But it is cheaper than SPY 26x and QQQ’s 36x. Yes, DIA does not have the earnings growth ceiling that the other headline averages do, with 1-year and 5-year forward EPS growth forecasted at 7% and 10% respectively. But earnings visibility may not be what it used to be. And, while DIA’s dividend is not very robust at 1.8%, it does pay out monthly, which income-equity fans may find useful.
DIA: historically undervalued versus QQQ
The chart below is one I have presented several times, but this update is particularly timely. Right now we are at a moment where the spread of QQQ’s return over DIA is virtually at its all-time high. This is often what happens before major market downturns. I am not going to “crystal ball” that one, but I will point out that some of my best decisions since the start of the pandemic were to use this simple comparison to determine how much “new economy QQQ” type exposure I wanted to have, versus “old economy DIA” exposure. I have already headed in that direction, with DIA as a core position in a couple of my main portfolios, and QQQ showing up only in the form of out of the money puts and calls.
Because I suspect that one thing QQQ will not do this year is put along quietly. So while I won’t “own” it, I do want to get a slice of a potential big move, regardless of direction. Or, as in 2020, in both direction, all in the first 4 months of the year!
DIA: Relatively less volatile recently, which could count for a lot in 2024
DIA is often less volatile than SPY and certainly QQQ, but its 30-day rolling volatility was only 8% during last December. That’s like saying the Dow has a VIX of 8, versus about 50% higher than that for SPY. That being said, the Dow and DIA are still a collection of US stocks, and over the past 5 years, we’ve seen 1-month returns as high as 14% in both directions (up and down).
87% of DIA is in only 5 of the 11 S&P 500 sectors. There are no REITs, no Utilities, and barely any allocation to Basic Materials and Communications. I look at that differently than many likely do.
I see DIA as an excellent, long-term core position from which I manage around tactically using any of the 200+ ETFs I watch closely every day. And in a year like the current one, there are already hints that within the inflated world of mega cap stocks, Dow and thus DIA are in good position to hold up better than the more popular US stock averages.
