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The DAX revamp: from boring 30 to sexy 40

Germany’s benchmark stock index, the DAX 30 has undergone a major historical comprehensive reform since the launch of it in 1988 by its index compiler, Qontigo, part of Deutsche Börse Group via the addition of 10 components stocks. The main aim of the newly revamped DAX 40 is to provide an even more comprehensive picture of the largest listed companies in Germany in terms of depth and breadth, thus in turn reflect the full spectrum of the German economy.

The new DAX 40 will be effective from next Monday, 20 September with no deletions to any of its existing 30 component stocks at this juncture and the next scheduled index review is on 3 December 2021. Here are some key highlights:

The introduction of a new profitability requirement

To be eligible to be part of the 40 blue-chip cohort of the DAX, future candidates must post a positive EBITDA (earnings before interest, taxes, depreciation and amortisation in their two most recent annual financial statements). Hence, such stricter pre-screening requirements are likely to improve the quality of DAX’s component stocks in terms of financial health and reduce the probability of lossmaking companies to be included in the DAX.

Simplified entry rules without foregoing investability

Index members will be selected by market capitalisation from the September 2021 review onward and stock exchange turnover will not be considered in the ranking process. Instead, members will need to fulfil a new minimum liquidity requirement. This new selection process by considering market capitalisation of free float in conjunction with minimum liquidity is likely to bring the DAX in line with international standards in terms of maintaining sufficient liquidity.

The 10 new members 

  • Airbus (aerospace manufacturer)
  • Zalando (online fashion retail platform)
  • Siemens Healthineers (medical devices manufacturer)
  • Symrise (supplier of fragrances, flavourings, cosmetic active ingredients)
  • HelloFresh (pre-packed fresh meal-kit delivery)
  • Sartorius (life sciences laboratory equipment maker)
  • Porsche Automobil (luxury carmaker)
  • Brenntag (chemicals distributor)
  • Puma (athleisure & sportswear)
  • Qiagen (biotechnology, provider of molecular sample & assay technologies)

What traders need to know

The addition of the above mentioned 10 members is likely to allow the new DAX 40 to have a reweighting shift towards companies that operate in the higher growth “new economy” segment such as Zalando, Siemens Healthineers, Sartorius, Qiagen and HelloFresh away from the traditional “old economy” sectors such as materials and industrials.

Due to the lack of higher growth and innovative oriented component stocks, the DAX has underperformed persistently against the rest of world especially the US stock market which has reaped the benefits of the “new economy” stocks such as the FAANG (Facebook, Amazon, Apple, Netflix, Alphabet/Google) and Microsoft as their respective business operations drive an increasing portion of global economic growth since 2009.

The performance ratio chart of the Global X DAX and iShares MSCI All Country World Index (59% weightage in US) exchange traded funds (normalised by USD to minimise the effects from foreign exchange gains or losses) has illustrated the significant underperformance of the DAX in the past decade Thus, with the newly revamped DAX 40, the current underperformance gap may be narrowed which in turn benefit the German stock market as a whole due to more potential capital inflows triggered by global portfolio adjustments and in turn create better liquidity conditions for the market.

Ratio chart of Global X DAX / iShares MSCI All Country World Index

Source: Trading View (click to enlarge chart)