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2 Steady Funds Getting Help From Big Blue

DIA, VWNFX are great ways to get a piece of IBM


IBMCan you name the stock with the highest weighting on the Dow Jones Industrial Average? I’ll give you a hint: Louis Gerstner was its CEO for nine years.

If you guessed IBM (NYSE:IBM), you’d be absolutely right. Gerstner took command in April 1993, and by the time he moved on in 2002, Big Blue was back to its former glory.

Investors interested in owning IBM’s stock without actually owning it can either buy an exchange-traded fund or a mutual fund that holds IBM in its portfolio — preferably one where it’s a top-10 holding. Read on and I’ll examine one of each.

SPDR Dow Jones Industrial Average ETF

When it comes to exchange-traded funds, there isn’t a huge number to choose from. In fact, your choice is limited to just two if you’re absolutely committed to tracking the returns of the oldest continuing U.S. market index.

State Street offers the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), which seeks to provide investment results similar to the index of 30 blue-chip stocks that includes IBM. The fund is the 17th largest, with total net assets of $12.1 billion; the top 18 ETFs in the U.S. have total net assets of $493 billion, which is about half the entire industry. Each is popular for different reasons.

DIA tends to get overlooked because of bigger funds like the SPDR S&P 500 (NYSE:SPY), which at $96.2 billion is by far the largest fund by assets. Nonetheless, if you’re looking for a good alternative to owning IBM, this fund of blue chippers should do the trick.

The beauty of DIA is that despite only possessing 30 stocks, it manages to spread its assets among nine sectors, with five having a 10% allocation or higher, including industrials at 21.7% and information technology at 17.7%. If jumbo-caps give you a feeling of security, the fund’s weighted average market cap of $141.7 billion will allow you to sleep at night. Some of DIA’s characteristics include a dividend yield of 2.35%, a price-to-book ratio of 2.7 and five-year earnings growth rate of 10.6%. While the fund’s earnings growth rate is similar to IBM’s, its price-to-book is one-fifth the tech giants, and its dividend yield is 75 basis points higher.

Performance-wise, DIA hasn’t quite kept up with Big Blue over the past decade, delivering an annualized total return of 5.03% compared to 6.57% for IBM. Investors in DIA gave up less than 200 basis points annually in return for diversification. But at an annual expense ratio of just 0.18%, this still should be a core holding for any portfolio.

Vanguard Windsor II

As mutual funds go, the best example I can find that approximates the 10-year return of the index or the DIA ETF is the Vanguard Windsor II (MUTF:VWNFX), a large-cap value-oriented fund that makes Money magazine’s 2012 “Money 70” list — one of only four actively managed Vanguard funds to do so.

Launched in 1985, the fund is truly a team effort, with six different investment management firms each handling a small piece of the portfolio. This convoluted group of advisers has invested the $33.5 billion in total net assets in 255 stocks, each with a median market cap of $44 billion. IBM is the third-largest holding with a weighting of 3.1%. Windsor II’s yield is 2.38%, almost identical to the ETF.

When you consider that VWNFX’s 10-year return through Jan. 25 was 4.89% — just 14 basis points less than the DIA — its expense ratio of 0.35% is more than reasonable. Most importantly, with a turnover rate slightly less than 23%, there’s a good chance IBM will be in its top-10 holdings for a reasonable amount of time.

In the coming days, we’ll look at more comparisons between passively managed ETFs and actively managed mutual funds. While many experts believe passive investing is the way to go — including Vanguard’s founder, John Bogle — in this example, at least, the answer’s nowhere near settled.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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