What is the DAX
The DAX (Deutscher Aktienindex) is the most important German stock index and tracks the performance of the 40 largest and most liquid companies on the German stock market. Thanks to its composition and sector independence, the DAX serves nationally and internationally as the benchmark index for the German economy. Find out in the following article how the DAX works and which other indices belong to the index family.
The History of the DAX
The German Stock Index (DAX) was first published on 1 July 1988. It was founded by the Börsen-Zeitung, the Frankfurt Stock Exchange and the Association of German Stock Exchanges. In the beginning, the DAX was merely a supplement to other established German stock indices. In the meantime, the DAX has developed into the most important index for the German stock market and serves as a barometer of sentiment for the economic situation in Germany.
After the company Wirecard filed for insolvency in June 2020 following an accounting scandal and nevertheless remained part of the DAX for a further 8 weeks, the stock index was reformed in September 2021. Among other things, the index was expanded from 30 to 40 members, the admission criteria were tightened, and disclosure requirements were introduced.
How does the DAX work?
The German Stock Index is measured in points. When it was founded in 1987, the index was set at 1,000 points. The performance of the individual shares contained in the DAX is reflected in the points gain of the stock index. Since 1999, the calculation has been based on data from the electronic trading system Xetra, which belongs to Deutsche Börse. Since 2006, the calculation has been accelerated to a one-second cycle. The trading hours of the Xetra trading venue are between 09:00 and 17:30. The calculation of the DAX begins at 09:06 at the latest and ends at the close of the stock exchange. Beyond the opening hours of Xetra, the LDAX is calculated by Deutsche Börse AG from 08:00 to 09:00 and from 17:30 to 20:00. This is done on the basis of prices on the Frankfurt Stock Exchange, which has longer trading hours. In addition, the XDAX is also calculated between 08:00 and 09:00 as well as from 17:30 to 22:00 on the basis of prices of the futures contract on the German Stock Index.
This is how the DAX is composed
Acceptance and exit criteria determine the composition of the DAX. The composition of the leading index is comprehensively reviewed twice a year, in March and September. In order to be included in the DAX, the market value of the freely tradable shares, the so-called "free float", within the last 20 trading days is the main criterion. A ranking is compiled starting with the largest market value. In order to be included in the ranking, shares must meet the following criteria:
The company must have either its registered office or an operational headquarters in Germany. In addition, a listing in the Regulated Market of the Frankfurt Stock Exchange and continuous trading on Xetra are requirements. Prior to admission, the company must have generated positive earnings (EBITDA) in the preceding two years. Furthermore, it is a requirement that at least 10 percent of the share capital is freely available (free float). As the final criterion, the share must already have been listed for more than 30 trading days. The following two rules apply for inclusion in and exclusion from the index:
Regular Entry: Non-members who finish in the top 40 in the ranking by market value of free-float shares are only admitted if they can simultaneously replace a member of the index that has slipped to rank 47 or worse in the ranking.
Regular Exit: Members who are no longer among the top 53 in the ranking by market value of free-float shares only leave the index if a non-member lands in the top 47. In addition to the semi-annual adjustment, a quarterly adjustment is also made in the months of March, June, September and December according to the rules for fast entry and exit:
Fast Entry: If a company ranks among the 33 largest companies measured by market value of free-float shares, it will definitely be included in the index. In return, it replaces a member that no longer ranks in the top 47, or if this is not the case, the least valuable member.
Fast Exit: If a member is no longer among the 60 largest companies in the ranking based on the market value of free-float shares, and a non-member achieves at least rank 47, a change is also made. Within the index, the individual shares are weighted according to the value of the free-float market capitalisation. The weighting of a single company can be a maximum of 10%. The calculation of the DAX point level is based on the index formula of Étienne Laspeyres.
What other DAX indices are there?
When we read about the DAX in the media, it is generally the calculation based on the performance index. A performance index reinvests dividends and thus only maps the price changes, as distributions usually lead to price reductions. In addition to the performance index, the DAX also exists as a price index, even though this is not known to many private investors. In addition to the DAX 40, there is the MDAX, which maps the 50 next largest companies. This is followed in the ranking by the SDAX with the next 70 companies. One of the most important indices in Germany is also the TecDAX, which covers the largest technology stocks on a sector-oriented basis.
Other indices include the ÖkoDAX, consisting of companies active in the field of renewable energies, while the DivDAX includes companies with particularly high dividend yields. Also worth mentioning is the volatility index, the so-called VDAX-NEW, which measures the expected range of fluctuation for the DAX. There are also a number of other DAX indices which are not listed here.