German Stock Exchange Introduces Additional Component in DAX Index
Title: Breaking the Cap: Deutsche Börse's New DAX Index for Heavyweights
In an effort to accommodate large companies like SAP, the Deutsche Börse is developing a second version of the DAX index. This unrestricted DAX will provide ample space for heavyweights, as revealed by business magazine Capital. "For investors seeking to reflect Germany's leading companies, we're crafting an uncapped DAX edition, set for debut in the first quarter of 2025," revealed ISS Stoxx, the DAX subsidiary of Deutsche Börse, upon request.
The move is a response to SAP's market capitalization, currently hovering around 310 billion euros. This surpasses the DAX's self-imposed 15% cap, which restricts the weight of a single share within the index. As a result, SAP consistently breaches this cap. In the past, Linde also experienced this, eventually exiting the Frankfurt Stock Exchange in 2023.
The DAX's weighting holds significance for professional investors. Actively managed funds limit their investment in a single share to 10%. However, benchmark investors, such as those managing DAX ETFs, adhere strictly to the index. In light of the cap, highly valued SAP shares must be reduced in many portfolios, offering opportunities to other investors in the uncapped DAX.
The institute discovered that a DAX without a cap exhibits no significant differences in terms of risk and return characteristics compared to the capped option. The return, volatility, and Sharpe ratio remain unchanged in the current year. However, future volatility could rise due to the index's increased dependence on individual shares, the Deutsche Börse warns.
Contrary to popular belief, the new DAX does not introduce a new index but rather an expansion of the existing DAX index. The updated index includes 40 constituents, ensuring broader representation of the German economy. A capping factor of 15% also maintains the diversified nature of the DAX, ensuring no single company dominates the index. Company selection criteria, including free-float market capitalization and positive EBITDA, remain consistent.
The DAX's present valuation of 18 times earnings provides an enticing alternative to the S&P 500's high valuation of 28. Investors seeking exposure to global growth at more reasonable prices could find opportunities in this discrepancy.
In conclusion, the new uncapped DAX provides an alternative avenue for investors eager to benefit from large companies' growth without being capped. The existing DAX's capping factor ensures a balanced and diversified index, preserving its integrity.
The uncapped DAX will offer ample space for companies like SAP, whose market capitalization exceeds the DAX's 15% cap, to fully represent their significance in the German economy. With the new uncapped DAX, professional investors managing funds will have more flexibility to invest in highly valued shares like SAP, potentially offering investment opportunities to other investors.
