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How does a Wall Street Journal decision to change the composition of the Dow Jones Industrial Average effect the Dogs of the Dow approach?
When the Wall Street Journal announces that they will change some of the stocks which make up the Dow Jones Industrial Average, no action is necessary up until your Dogs of the Dow anniversary date (i.e. the one day per year that you have chosen to adjust your Dogs of the Dow portfolio). Simply continue to hold on to your current Dog stocks. When your anniversary date arrives, choose the Dogs and/or Small Dogs using whichever 30 stocks make up the Dow at the time of your trading.
Why does the Wall Street Journal change the composition of the Dow Jones Industrial Average?
The editors of the Wall Street Journal want to ensure that the Dow is composed of 30 large stocks which will best serve as a proxy for the market as a whole. As the U.S. economy evolves, so too must the Dow Jones Industrial Average.
How often does the Wall Street Journal change the composition of the Dow Jones Industrial Average?
We have created a Dow Deletions table listing the changes over the last 30 years.
Are there any unit trusts that utilize the Dogs of the Dow approach?
Yes, Merrill Lynch offers a unit trust that utilizes the Dogs of the Dow approach. The unit trust is also sold by Dean Witter, Paine Weber, Prudential, and Smith Barney to name a few.
Under what conditions should I consider investing in a unit trust?
If you don’t have a large amount of money to invest (i.e. less than $4,000) you may want to consider a unit investment trust that invests in the Dogs of the Dow. They each charge around 1.0 percent for an up front sales charge and around 1.75 percent for an annual fee and require a $1000 initial investment ($250 for individual retirement accounts). Each unit trust is liquidated each year whether or not a stock will carry over into the next year as a Dog. This results in a capital gains tax that is higher than if you were to trade the stocks directly through your own individual account. If you estimate that 35% of the Dogs and 50% of the Puppies will turn over (a reasonable
estimate by historical standards) and you assume that you can buy and sell at $15 per transaction (not difficult with today's discount brokers), the unit trusts are the more costly way to go if you have a minimum investment of $4,000 and are willing to invest in the Small Dogs of the Dow. If its the Dogs of the Dow you want to invest in, you will need to front up $7,500 or more to be more cost effective than the unit trust. These rule of thumb numbers do not take into account capital gains taxes which will be higher for the unit trusts. We have prepared a Dogs of the Dow UIT Cost Comparison which compares the costs of the unit trusts relative to an individual account.
Are there any mutual funds that utilize the Dogs of the Dow approach?
You will not find a fund that invests 100% of their assets in the Dogs of the Dow since SEC rules dictate that no mutual fund can invest more than 5% of its portfolio in any one stock. As for funds that invest a portion of their assets in the Dogs... The Hennessy Balanced Fund puts half of its assets into the Dogs of the Dow and half into Treasury Bills. The Payden & Rygel Growth and Income Fund invests half of its assets in the Dogs and half in the stocks which make up the S&P 500 index. The Dogs of the Market Fund places half of its assets in the Dogs and the other half in other high yielding stocks. Keep an eye on the fees since they can get well above 1% (per year) of your investment. We believe that fees for index type mutual funds should be well below 0.5% and in fact
should be comparable to other index funds with fees around 0.2% (per year). One final note, you should also consider the opportunity costs of these "hybrid" funds. Fifty percent of the portfolio may be placed in investments that may not perform as well as the Dogs. If this is the case, there is a cost associated with this diversion of funds.
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