What you need to know about the change to the DAX 40 index

The new DAX 40 index.

The DAX 30 will soon be admitting ten more companies in a move that will affect the industry makeup, weighting potential and the regulatory practices of Germany’s flagship stock index. Here’s more on the move from DAX 30 to DAX 40.

The DAX 30 is Germany’s flagship index, representing 30 of the country’s largest companies by market capitalisation. But following an announcement by the exchange operator Deutsche Boerse in 2020, it is set to become even larger when it switches to the DAX 40, incorporating ten of the largest companies from Germany’s MDAX listing. Here are the key points for traders to know about the change.

Why is the DAX 30 changing to the DAX 40?

The DAX 30 is changing to the DAX 40 in order to increase the quality of the DAX indices, provide a more comprehensive picture of Germany’s largest businesses, and align the DAX indices with international standards, the Deutsche Boerse has said.

The decision was made in conjunction with a set of further reforms to the German index, such as the toughening of corporate governance rules, following an accounting scandal at payment processing company and former DAX 30 constituent Wirecard.

When will the DAX 30 become the DAX 40?

The DAX 30 will become the DAX 40 in September 2021, according to Deutsche Boerse, but there is currently no specific date earmarked for the change.

What will change when the DAX 30 becomes the DAX 40?

When the DAX 30 becomes the DAX 40, the Deustche Boerse will admit ten more companies to the index, meaning a potential change in the weighting allocations and a broader range of sectors covered, as well as other regulatory provisions.

Index additions

Potential additions to the index include aerospace giant Airbus SE, e-commerce operator Zalando, and global reinsurance group Hannover Rueck SE, with other likely additions including property company LEG Immobilien and Siemens Energy.

More companies equals a potentially wider range of sectors and a revision to index weightings, meaning traders should understand how the new weighting and particular sector activity can impact the DAX 40 as a whole once the adjustments are implemented.

Selection criteria change

While previously the DAX 30 considered stock exchange turnover for its rankings, now index members will be considered for liquidity levels instead.

New members will have to demonstrate the usual market capitalisation credentials, but now they must prove their profitability over their two most recent annual financial statements. This has implications for companies similar to Delivery Hero, which replaced Wirecard in the DAX 30 despite having never recorded a profit. Under the new rules, Delivery Hero would not be eligible.

Companies must also comply with the recommendations of the German Corporate Governance Code, which involves having an existing audit committee on the supervisory board. For existing members of the index, a transitional period will mean compliance is delayed until September 2022.

Additional compliance requirements

The DAX indices will undergo another review, with two scheduled main reviews a year to replace the single annual review carried out in September. There will also be a requirement to publish timely quarterly statements and audited annual results, Deutsche Boerse unit Qontigo has revealed.

Impact on MDAX

The change will mean that the MDAX, the German index that covers companies of a lesser value, will lose around a third of its total market cap as it reduces the number of constituents to 50 from 60, leading some commentators to express concern over potential reduced liquidity for the smaller index.

How might the DAX 40 impact traders?

As mentioned, the expansion of the DAX 40 will mean more companies, more sectors, and the potential for revised weighting. This may mean giants such as software company SAP, which currently has the largest weighting in the index, may exert less influence over the DAX’s moves once the changes come in. However, some believe that since the additions will feature smaller-capitalised organisations that any change at the top of the index won’t be significant.

The potential increase in representation across industries could mean the wider DAX proves a better proxy for the German economy, as speculators are able to see more diversity of sector across one index rather than two. As constituent companies change positions within the index, there may be an increasing need for traders to revise their fundamental analysis and research sectors with which they were previously unfamiliar.