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Taking a closer look at DAX

03 Mar 2020

Taking a closer look at DAX

The composition of the DAX family is reviewed quarterly. The next rebalancing is performed on 4 March. To understand how a review is done, we asked Veronika Kylburg, product developer at Qontigo and primarily responsible for the DAX index family, to explain it to us.

Veronika Kylburg

The review of the DAX family is just around the corner. How often is the review taking place?

DAX is subject to a regular annual review in September. The MDAX, SDAX and TecDAX indices are reviewed twice a year in March and September. In addition, the index composition is reviewed in the remaining quarter end months, on the basis of the so-called “fast entry” and “fast exit” rules. This is also the case now in March. Additionally, there are also unscheduled adjustments, for example if the free float of a company falls below 10 percent due to a takeover.

Can you describe the review process?

The companies in DAX are selected based on free float market capitalization and liquidity. To compare these figures for all companies in the Prime Standard, a so-called ranking list is compiled on a monthly basis. We receive the price data and order book turnover from Xetra; other parameters, such as the number of shares used to calculate market capitalization, are determined by our research team. For this purpose, a large amount of public information, such as company announcements, is evaluated.

At review, we apply fully transparent rules to determine the top 30 stocks. In March, for example, these are the “fast entry” and “fast exit” rules, which help us to determine which companies are added or deleted. But to be honest, this is mostly the case for SDAX and MDAX rather than DAX, which is relatively constant in its composition.

The index adjustments in March, June, and December are intended to account for significant changes on the ranking list in short term – in addition to the regular review in September. These may arise for companies that fall below a certain size or liquidity threshold, for example because of large drops in their share price (free float market capitalization).

Why does the DAX include 30 companies?

The DAX index has been around since 1988 and was already consisting of 30 stocks back then. Together with its family members, the MDAX and SDAX, it covers around 97 percent of the free float market capitalization in the Prime Standard, which is a reasonable size. From an international investor’s perspective, an expansion of the DAX index to 50 stocks, for example, would mean an expansion to companies at mid-cap level; the difference between the largest and smallest companies is already immense. To put this into perspective, we are talking about a range between €6 billion and €129 billion free float market capitalisation.  Such an extension would also have implications for the composition of the MDAX and SDAX, which would continue to move towards the small-cap level. Also, the liquidity would suffer considerably.

DAX has established itself worldwide as a benchmark and barometer for the German economy. The index serves as underlying for around 150,000 financial products. There are currently 17 ETFs issued on the DAX, with invested assets of €14.2 billion. A change in size would also affect the risk-return characteristics and tradability, as well as being reflected in trading costs.

There are several DAX variants. Why has the performance index prevailed?

All selection indices are calculated as price (tracking pure price performance), performance (fully reinvesting all dividends) and net return indices (reinvesting the net dividend). DAX is usually considered as a performance index.

From the investor’s perspective, a performance index reflects dividend payments better. With a price index, these payments are lost for the investor from the index perspective. From the company’s perspective, companies have three options for using profits: Firstly, cash to pay the dividend, secondly, reinvest in the company, or thirdly, buy back own shares. So, a performance index is an incentive to pay dividends.

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