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Comprehensive overhaul for DAX index family

21 Sep 2018

Comprehensive overhaul for DAX index familyOp-ed article in Börsen-Zeitung by Holger Wohlenberg

Holger Wohlenberg, Managing Director Data & Index, Deutsche Börse

This year, we have revised some of our oldest and most established benchmark indices. MDAX®, SDAX® and TecDAX®, our indices for German mid-sized and small companies and technology shares, have been part of the DAX® family since 1996, 1999 and 2003, respectively. They have grown to become measures of reference and underlying for investors and issuers in Germany, Europe and beyond.

On 24 September this year, Deutsche Börse will modify the composition of MDAX, SDAX and TecDAX to better reflect their representation of the underlying markets and align their methodologies with international standards.

Revised industry structure

The main catalyst behind the update was a reconsideration of the sectorial divide at the centre of these indices’ composition: namely, the segregation between technology stocks on one hand, and “classic” industries on the other, for the three indices below the blue-chip DAX.

Traditionally, MDAX has included the 50 “classic-industries” companies that follow after DAX constituents in terms of free-float market capitalisation and order book turnover. SDAX has included the 50 companies from “classic” industries that come after MDAX components. Technology companies below DAX have historically been eligible for TecDAX only.

Deutsche Börse is now eliminating this “horizontal” segregation, by also allowing tech companies to be included in MDAX or SDAX. Hence, both indices become so-called “size indices” covering the entire market irrespective of sector affiliation. The benchmark DAX – which covers the shares of Germany’s 30 largest and most liquid companies – has traditionally not had any industry-related entry restrictions.

Broad technology index

Additionally, Deutsche Börse is also removing a “vertical” separation by size and liquidity (order book volume) in TecDAX to allow technology stocks currently in DAX into the technology-focus gauge. This will allow Deutsche Börse to offer a broad tech index without any small- or mid-cap bias.

The removal of the technology-vs.-classic separation will have another direct effect: it will boost the total and median free-float capitalisation of MDAX, SDAX and TecDAX, as large technology shares enter the indices.

MDAX and SDAX expanded

The rules changes to be introduced this month are the result of extensive internal analysis and a broad market consultation. The initial consultation was launched in January this year to get market participants’ opinions and suggestions on considered modifications.

Responses indicated index users favoured a larger number of index constituents to preserve the breadth of market coverage provided by the sector-independent indices. Thus, MDAX is growing to 60 from 50 stocks, and SDAX has been expanded to 70 from 50.  In TecDAX, a sector-specific index, the number of components remains unchanged.

Rules-based methodology

The systematic and rules-based methodology that characterises the three indices will remain intact, as will the review frequency. The new rules were applied for the first time in the creation of the eligibility ranking list for the upcoming index changes published on 5 September and will be reflected in the index calculation of MDAX, SDAX and TecDAX as of 24 September.

We are confident that this rules change will improve the usability of our indices and enhance their position as genuine representatives of their respective markets, something that all of our indices strive to do. It also ensures their applicability, replicability and liquidity.

Accurate representation

The most important revamp of MDAX, SDAX and TecDAX since their creation shows our commitment to upkeep our offerings at any and all times to meet investors’ needs. Going forward, we will continue to ensure our indices’ profiles are upheld, while abiding by our principles of representativity, tradeability, rules-based approaches and full transparency.

The original German version of this article was first published in Börsen-Zeitung on 21 September 2018.

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