General Information
The German Stock Index (DAX) represents the 40 largest companies in the German stock market and thus includes 80 percent of all German publicly traded corporations. The index is based on the daily data from the electronic exchange Xetra, which is open from 9:00 am to 5:30 pm.
The DAX stock family extends across the MDAX and SDAX. Companies can therefore join and exit the DAX, depending on their performance. The Deutsche Börse, which manages the index, determines which companies are included.
Calculation of the index
The calculation is based on a price index, which is derived from the formula of the economist Ernst Louis Étienne Laspeyres. The companies/stocks in the DAX are weighted differently and therefore have a different impact on the overall performance of the DAX.
In short: Free float times share price equals the index weight. This means that only the market capitalization of freely tradable stocks is taken into account for the calculation. So if a major shareholder owns more than 5% of the company, these 5% are excluded from the weighting. The upper limit is 10%, so a company could account for a maximum of 10% of the index.
The DAX is published both as a performance and as a price index. In the case of the performance index, the dividends of the companies included in the DAX are reinvested mathematically. In the case of the price index, the dividends are not taken into account.
Overview of the index history
The German Stock Index combines the 40 largest companies into one value. The first publication was on July 1st, 1988 with a level of 1,000 points. However, for a long time, the DAX only consisted of 30 companies. In September 2021, it was expanded with 10 ascenders from the MDAX to better represent the German economy.
The best and worst days of the DAX
The DAX recorded its highest daily gain on October 13, 2008 due to speculation about a bailout package in response to the recession starting from 2007 caused by the financial crisis. On that day, the DAX closed with a gain of 11.4%. Another significant gain of 11% occurred on October 28, 2008, driven by the short squeeze of VW shares.
One of the largest daily losses occurred on March 12, 2020 due to the outbreak of the Corona Virus. On this day, the DAX lost 12.2%. On August 19, 1991, the DAX dropped 9.4% in response to the coup attempt in the Soviet Union against Mikhail Gorbachev.
DAX Historical Price Performance
The expansion to 40 companies should benefit the DAX quite well, as it now includes more growth companies in the index. In the long run, the DAX significantly lags behind similar indices like the Dow Jones, but it has also consistently delivered positive returns over the long term.
DAX: Importance for private investors
In comparison to European indices, the DAX is performing quite well. Over the past 5 years, the index has delivered a return of 31%, whereas the Euro Stoxx only achieved 25% and the FTSE 100 earned 5% return. From a historical perspective, investing in the DAX is not a bad choice if one wishes to be invested in Europe.
However, on an international level, the German stock index cannot compete. The very broadly diversified MSCI World has also performed significantly better in the last five years, with a return of 66%. Therefore, investing in this index and the DAX stocks should be carefully considered.
