- After more than 30 years, the DAX is undergoing its first far-reaching reform.
- As a result, the DAX will cover the German economy even more comprehensively and will increase diversity through new sectors.
- In addition to new members, the index is being given new rules to prevent a second Wirecard case.
The DAX, Germany's leading index, added ten member stocks on 20 September, turning from the DAX 30 into the DAX 40. All new additions, in line with Deutsche Börse's index logic, moved up from the MDAX for mid-cap stocks to the DAX lead index. As a result, the MDAX reduced from 60 to 50 stocks.
For some years, finance experts have been calling for reform of Germany's leading stock market barometer, launched in 1988. The biggest criticism was that it no longer represented all German economic sectors and gave too much weight to "old economy" companies from mechanical engineering, automotive, construction and chemicals. Services and tech were underrepresented.
1 S&P 500 Market capitalization in % of Russell 3000 Index
2 IBEX 35 Index Market capitalization in % of Madrid Stock Exchange General Index
3 FTSE 100 Index Market capitalization in % of FTSE All-Share Index and FTSE AIM All-Share Index
4 CAC 40 Market capitalization in % of CAC All-Share Index
5 Swiss Market Index Market capitalization in % of Swiss All-Share Index
6 Dax Market capitalization in % of CDax
7 Nikkei 225 Market capitalization in % of Topix Index
Half the companies listed on the DAX have been there since its inception.
The DAX 40 will cover significantly more market capitalisation
The reformed DAX 40 will better represent the German economy. The DAX 30 covered only around two thirds of German companies' total market capitalisation compared with European counterparts such as Paris's CAC 40 or London's FTSE 100.[1] With the ten new members and the rules adjusted, the leading index now covers around 80 percent of German market capitalisation. This also puts the DAX 40 on par with the US benchmark index S&P 500, for example.
However, the reformed DAX's individual sector weightings are not likely to change that much for now. Yes, the index is gaining companies from medical and healthcare, previously unrepresented or under-represented, and from e-commerce. But these new additions have a weighting of only around ten percent on the new index. Christoph Ohme, fund manager at DWS ESG Investa, summarises, "With the newcomers, the Dax will be somewhat more diversified in the future. However, since companies from traditional sectors such as industry and automotive are also among the newcomers, the expansion should not result in too much of a change in sector weighting for the time being."
But even if the sector mix doesn't change too much at first, the new size and diversity could still make the DAX more attractive to investors. "The new members come from rather high-growth sectors. Overall, we hope that the German benchmark index will also gain further international importance as a result of the reform and that more investment money will be invested," says Ohme.
Stock exchange turnover unimportant in future – only market capitalisation counts
In addition to the new members, the rules governing DAX membership were also revised. The most serious change is that the trading venue and trading volume will barely affect index membership in the future. Previously, DAX members were determined by their trading volume on Deutsche Börse. However, rankings on the XETRA trading system will no longer be a selection criterion. New DAX 40 members will still have to have a certain minimum liquidity, but market capitalisation will be the dominant criterion – even outside the German market.
Another important point: new DAX members must have generated an operating profit after interest, taxes, depreciation and amortisation for at least two consecutive years. This applies only to new additions.
Also, in future, DAX 40 companies will have to submit their audited annual reports and quarterly reports on time to remain in the index. The DAX 40 composition will now be reviewed twice a year, in May and September.
Trading volume on the German market as a criterion for inclusion on the DAX no longer applies.
Investors in DAX funds don't have to do anything – the providers are switching
How will the new composition be reflected in the investment products? What will change for investors invested in funds with a DAX focus? They can sit back and relax. Nothing will change in the current DAX score as a result of the reform. In the days surrounding publication of the DAX 40, fund companies will buy more stocks and restructure accordingly – especially if the fund, for example as an ETF, claims to track the DAX precisely.
