Since its launch in 1991, the ASM Fund has had a winning portfolio: the 30 blue-chip stocks of the Dow Jones industrial average. ASM is an index fund on the world's best-known stock market index, yet it has a mere $46 million in assets--just $10 million more than one day's take for the Vanguard Index Trust 500 Portfolio, which tracks the Standard & Poor's 500-stock index. (S&P is a unit of The McGraw-Hill Companies, parent of BUSINESS WEEK.) ASM would be many times its size if it could only use the Dow in its name.
Now, that just might happen. On June 5, Dow Jones & Co., the proprietor of the Dow Jones industrial average, announced that it would license its average and trademark for futures and options. So far, Dow Jones has not licensed the name to any mutual-fund managers, but a spokesman says the company will pursue that avenue.
BIG DRAW. Mutual-fund companies are already lining up at Dow Jones's door. Steven H. Adler, portfolio manager of the ASM, plans to seek a license. Patrick Rogers, whose Gateway Index Plus Fund is an S&P 100-stock index fund that sells options to create additional income, says he would be interested in offering a similar Dow fund, too. So would Joan A. Payden, whose Payden & Rygel Growth & Income Fund is split between the S&P 500 and "dogs of the Dow"--a strategy that invests in the 10 highest-yielding Dow Jones stocks. Says Payden: "The Dow has tremendous drawing power with retail investors."
Vanguard, the leader in index mutual funds, isn't interested. "The theory and rationale for indexing depends on a more broadly diversified index," says George U. Sauter, Vanguard's index fund chief.
So far this year, the 30-stock Dow and the 500-stock S&P are moving in lockstep (table). Over longer periods, the Dow has made bigger gains. Since the bull market started in 1982, for example, the Dow is up 870.4% vs. 734.3% for the S&P 500. But looking ahead could be different. In an increasingly technologically driven world, the Dow has only two technology companies, IBM and Hewlett-Packard, but no Microsoft or Intel. The Dow has a money-center bank, J.P. Morgan & Co., but no dynamic superregionals such as NationsBank, BankAmerica, or First Union. The Dow diverges from the S&P in its heavy representation in traditional industries. It contains two chemical companies, DuPont and Union Carbide, yet only one drugmaker, Merck.
The two indexes also differ in how they're computed. In the Dow, a $1 move in a stock affects the average the same way--3.52 points. In the capitalization-weighted S&P, the impact of a share price is related to the company's size. Take Aluminum Co. of America, a Dow stock that has just a 0.19% weighting in the S&P 500. If it were to double, it would add just 0.19%, or 1.6 points to the S&P, vs. an increase of 261 points in the Dow, or 3.5%.
S&P index mutual funds, with nearly $90 billion in assets, got started 20 years ago. So no one expects Dow funds to overtake them soon. But considering the appetite for index funds and the Dow's brand-name recognition, a Dow index fund should be one hot product.