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What to Know About the New DAX

9 Sep 2021 | 2 min read
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Germany’s and Europe’s key equity index will on the 20th of September 2021 undergo its largest revision since its inception in 1987. Whether you are an active trader or owner of a passive index fund, the ramifications will most likely be wide.

Germany’s and Europe’s key equity index will on the 20th of September 2021 undergo its largest revision since its inception in 1987. Whether you are an active trader or owner of a passive index fund, the ramifications will most likely be wide. Since its inception in 1987, the index has been heavily weighted towards banks, chemical companies, and pharmaceuticals. The exception has until now been SAP, the only pure software company. With the addition of ten more companies to the index, the new DAX 40 has the potential to become a better proxy for the German economy.

Why is the DAX being revised?

The new index will take effect on 20 September 2021. With the inclusion of an additional 10 constituents to the new DAX, the MDAX will shrink from 60 to 50 constituents. The new index will enforce stricter rules on the new constituents, emphasizing corporate governance and profitability. The new constituents will not only have to live up to the usual market capitalization credentials but will also have to prove financial profitability over the last two years, as well as publish timely quarterly statements. Failure to comply with the rules will result in exclusion from the index.

Another motivation behind the initiative is to create a new index that more accurately reflects the current German business environment. With the exception of SAP, the index has up until now only constituted of banks, chemical companies, pharmaceuticals, automakers, and industrial groups. Along with eight other new constituents, included in the new index are Zalando, the Berlin-based online retailer and Hello Fresh.

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Impact on traders

The DAX is the most frequently traded underlying asset in the Nordics. With the new index composition, traders ought to recognize the way in which the changes may impact their research and trading. With more companies and sectors included in the index, SAP could potentially have less significance on index performance. With the inclusion of more companies and sectors, the new index also has the potential of being a better proxy for the German economy as a whole. It would however also result in traders needing to revise the industries which they analyze and begin researching sectors of the economy that they perhaps were unfamiliar with in the past.

Source:

Germany’s Dax undergoes makeover as it expands from 30 to 40
www.ft.com/content/297a35a8-df37-4091-a283-1914cdbd3e8a (02.09.2021)

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