When the German leading index Dax started in 1988, many commentators liked to compare it with its animal counterpart. On some days it was said that the Dax had “shown itself to be friendly today”. If things went worse, then the Dax just “did not dare to get out of its construction”. At that time, many investors looked at every movement of the leading index with love as an animal – but this love for the leading index seems to have grown increasingly cold. The performance over the past few years has proven to be comparatively meager, and after the Wirecard case, the leading index also seemed to have been shaken by scandal.
If the stock exchange is orchestrating what is probably the biggest reform since the DAX was launched, then that should be taken literally: a lot of orchestra thunder, little substance. The fact that companies have recently had to submit their annual and quarterly reports on time and otherwise fly out of the index after a short waiting period may sound strict. But as soon as the companies have reported their numbers meekly, they can be put back on the list of candidates.
The fact that potential candidates for promotion must have made operational profits two years before promotion may sound like more solidity for the Dax. The decisive factor is, of all things, the profit figure before interest, taxes and depreciation – which leaves some things out. On top of that, the new severity has done away with it. Because as soon as the companies have made it into the index, they can blatantly write losses again.
The reform is not a big hit for investors either. The Dax should actually become wider, livelier and more dynamic, as many bankers have celebrated in recent days. Some equity savers seemed to have a better diversification of their assets if they followed the index one-to-one with special index followers. But if you look closely, you will quickly see that apart from a bit of superficial cosmetics, not much is to be expected from this reform.
Sure, with ten new titles, some hip internet companies can find their way into the prestige index, including some promising medical companies. But taken together, the ten newcomers in the share barometer should only represent around 15 percent of the entire Dax. They only rank under “also ran”. Preliminary calculations by the stock exchange from July even show that the bottom line is that the weight of the scolded “old economy” in the index is unlikely to change at all. The reform does not solve the real problems of the leading index.
The stock exchange could have admitted this with argumentative strength: even in the FTSE Germany index, which has around 160 stocks, the 40 largest companies represent roughly 80 percent of the index, while the 118 smallest stocks only represent around 20 percent. So even if you superficially inflate a Germany index really big, in the end you just add flyweights. Knowingly ignoring such facts shows in the end that the Dax reform is a well-calculated PR campaign. 40 stocks instead of 30 titles, that’s good for a bold headline – but not for a solid investment.
Incidentally, the stock exchange completely left out the biggest label fraud in its index reform: While most of the other leading indices in the world only show price gains in their curves, the stock exchange includes the reinvested dividends in the Dax run. While the normal dividend Dax has more than doubled since the turn of the millennium, the converted Dax without dividends only increased around 25 percent. It’s a bitter truth that just wouldn’t do well on the price board in the trading floor.