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How do exchange-traded funds affect the Dow Jones Index?

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Quick Answer

Several exchange-traded funds track the Dow Jones Industrial Average but have a negligible impact on the price of the 30 companies that comprise the Dow index, according to The Motley Fool. Since the Dow is such a liquid index, ETFs that track the Dow have little impact on market activity.

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Full Answer

The majority of ETFs trade in secondary markets and, therefore, have little to no effect on underlying markets, especially liquid markets and indexes such as the Dow, explains the Investment Company Institute. Most trading activity involving ETFs revolves around the buying and selling of existing shares instead of creating new shares, which keeps ETFs from diluting the underlying market that they track.

The Dow Jones Industrial Average contains the stocks of companies known as large-cap stocks, notes Investopedia. Therefore, the index is less volatile than other indexes. The ETFs that track the Dow hope to gain exposure to the index and create additional income for their investors. Some ETFs that track the Dow, such as the Proshares Ultra Dow 30, seek to produce two times the yield of the Dow on a daily basis. However, the Proshares Ultra Dow 30 and other ETFs that track the Dow have little to no impact on the overall market volatility of the Dow.

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