After a scary start to the year, the Dow Jones Industrial Average made an impressive comeback over the past one month. The index, which had fallen 11.3% in the first three weeks of 2016, has recouped all its losses and is now up more than 1% since the start of the year.
Inside the Recent Surge
The remarkable rebound was driven by a jump in oil prices and a slew of positive economic indicators, which erased fears of a recession in the U.S. In particular, oil price zoomed more than 50% from its 13-year low hit in mid February on signs of reducing supply glut and hopes of a deal by major oil producers to freeze oil output. This has started rebuilding investors’ confidence in the rebalancing of the oil market, giving a huge boost to energy stocks and other commodities (read: 4 Energy ETFs Outperforming on Oil Rebound).
Among the most notable upbeat data was the February jobs report, which showed continued strength in hiring, easily dodging the global slowdown. The economy added 242,000 jobs in February, much above the market expectation of 190,000. Unemployment dropped to an eight-year low of 4.9% and inflation climbed 2.3% in the 12 months through February, marking the biggest increase in more than three years, following the 2.2% increase in January.
While the manufacturing sector has contracted for the fifth month in February, it improved from January with growth seen in half the industries, including wood products, furniture, miscellaneous manufacturing, and primary metals. Further, housing starts rebounded with an increase of 5.2% in February, hitting the highest level since September, buoyed by strong demand. This was preceded by a drop of 3.8% in January and 2.5% in December (read: Manufacturing Data Point to Recovery: ETFs, Stocks to Consider).
Added to the optimism is the dovish stance from the Fed released in the latest meeting held on Thursday. The Fed kept the short-term interest rates steady in the 0.25–0.50% band and dialed back its projection for this year’s hikes to two times instead of four. Lower interest rates will pull out capital from the country and lead to the depreciation of the U.S. dollar, thereby benefiting exporters. A weakening greenback would also provide some relief to declining corporate earnings, driving the stocks higher.
Given this, we have highlighted some ETFs that could be compelling choices for investors seeking to ride the recent bull run in the Dow.
SPDR Dow Jones Industrial Average ETF (DIA – ETF report)
The ETF tracks the performance of the Dow Jones Industrial Average, which includes blue chip companies that are considered leaders in their respective industries. It holds 31 stocks in its basket with each security holding less than 6.5% share. The fund is widely spread across nine sectors with each taking up less than 20% share in the basket (see: all the Large Cap ETFs here).
DIA is one of the largest and most popular ETFs in the large-cap space with AUM of over $12.2 billion and average daily volume of 7.2 million shares. It charges 17 bps in fees per year from investors and has gained about 1% so far this year. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.
