The DAX index will now have 40 companies instead of 30
The DAX 30 is the leading index of German stocks and has traditionally listed 30 of Germany’s largest companies. These companies have been 30 in number since the index launch in 1988 but will now increase to 40.
Selection of companies into the index will be based on market capitalization and not trading volumes. These details were released by exchange operator Deutsche Börse in 2020. The change in the index is expected to go live by September 20, 2021.
Many analysts speculate that the changes were initiated due to the Wirecard scandal. The high-flying financial payment processing services provider filed for insolvency in 2020, and operator Deutsche Börse faced mounting criticism and demand for reform for the index.
DAX 30 to DAX 40 is a response to the widespread call for listing reforms for the 32-year-old premium index for German companies.
What does this mean for investors?
When the DAX 40 emerges, it will have ten more companies, which will be included based on their market capitalization. For investors, this means that weighing allocations and sectors included in the index will change. In addition, regulatory requirements and exposure values may end up amended for an individual or group investor.
This expansion of the index is seen as a long-overdue step. The index will now require that its member companies post a profit over the last two quarters, comply with more reporting requirements, and meet some requirements of audit committees in the German corporate governance Code.
Once the revised index goes live, the single parameter for inclusion will become market capitalization, and trading volumes will not significantly impact index eligibility.
New Companies to the DAX 40
The increased index size can be taken as an adaptive move to adjust to the changing economic scenario as the German market evolves. Companies included in the new index are:
- Airbus SE
- Zalando SE
- Siemens Healthineers AG
- Symrise AG
- HelloFresh SE
- Sartorius AG Vz
- Porsche Automobil Holding
- Brenntag SE
- Puma SE
- Qiagen NV
Effect of DAX on MDAX
The expansion of the DAX will affect the MDAX directly as its top-tiered companies move to the DAX, and the MDAX will be left with 50 companies (instead of 60). As a result, investors in the MDAX could end up with lower exposure levels to specific sectors and companies that move to the DAX.
As it loses its top market capitalized companies, the MDAX loses half of its market capitalization and shrinks to a significantly smaller size. It means the MDAX will represent middle-tier market capitalized firms while the DAX represents the blue chips of the German economy.
What is the impact on Investment Portfolios?
The DAX 40 transition is anticipated to allow newer and growth cycle companies to grow into the DAX based on the new market capitalization and profitability guidelines. As a result, the index should reflect the German market’s performance better.
While the index has not underperformed, it has not performed remarkably well over its life. An investor who invested in the index at inception in 1988 would have received a yearly return of 8.6% on average. €100 invested at inception would now be worth €1'589. This return can be compared to the FTSE 100 returns, while the S&P 500 has an average of 11% for the same period.
The index is now shifting from the traditionalist composition of banks and chemical companies to a broader range of sectors.
The key sectors include automakers, industrial groups, biotech, healthcare companies, food flavourings niche player Symrise and online retailer Zalando. However, Tech remains heavily underrepresented, with the only software company being SAP.
1. Airbus SE
Airbus is a vast company restricted from earlier inclusion due to its dual listing in France. Airbus is a heavy dividend player that would boost index returns.
2. Zalando SE
Zalando is in the growth stage and reinvesting heavily into establishing itself as a prime clothing source in the crowded online clothing segment.
3. Siemens Healthineers AG
Siemens Healthineers was listed in 2018 as the parent company tried to slim down its structure. The boom in life sciences and biotech is adding weight to its profile. It recently acquired radiation therapy leader Varian
4. Symrise AG
Symrise is a behind-the-scenes player for all of us. The fragrances and taste products are proprietary and high demand, used in soaps, toothpaste, and even sunblock. Sales are rebounding post-pandemic.
5. HelloFresh SE
This recipe, ingredients, and pre-packed food box supplier boomed during the pandemic-related lockdowns, and some growth has been sustained post lockdown as well.
6. Sartorius AG Vz
This lab equipment manufacturer is experiencing a boom due to its bioreactors demand, used in the RNA-based Covid 19 vaccines.
7. Porsche Automobil Holding
Closely linked with the Volkswagon group, the company is amongst the oldest car manufacturers in Europe.
8. Brenntag SE
Over a century old, this chemical distributor has been chasing the blue-chip status of DAX enlistment and is currently restructuring, which could impact dividends in the short run.
9. Puma SE
The sportswear manufacturer is currently riding a high due to the Euro 2020 sponsorship win, where the Italian team sponsored by Puma won.
10. Qiagen NV
Riding a peak due to massive demand for its range of tests for Covid and genomic surveillance kits for identifying new strains of the deadly virus.
How to handle the DAX 40 impact?
An expansion in the DAX 40 should be capitalized upon as it offers more companies, a few more sectors, and different weightings to the existing (and new) listings. However, don’t expect radical changes to the index’s returns.
While software giant SAP, which rules the index at present, may have less impact once the new index goes live, many analysts are forecasting little to no impact on index performance. The rationale for the low impact makes sense; the companies selected all have smaller market capitalization than the existing companies and will not significantly impact the top players.
The increased representation of industrial sectors will reflect the German economy better and showcase its diversity for investors and analysts.
The actual performance and weightage will show its impact over time as the index starts to trade from September 20. The incoming companies to the index can expect to enjoy market stimulus for some time, though. The prestige or additional focus due to inclusion in the index should benefit their share prices and market performance.
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