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Investing in the DAX (GER30): What to consider
The DAX index (also called Germany 30 or GER30) is an index which tracks 30 of the biggest publicly traded companies on the Frankfurt Stock Exchange, including well-known brands such as Adidas and BMW. While it is the most popular index in Germany, since it only has 30 components, it is not necessarily considered a benchmark of the German economy’s overall vitality.
Who should include DAX in their portfolios?
- Thematic investment in Germany: Since it is Europe’s biggest economy, investors who believe in long-term growth in the country and the EU as a whole could consider investing in the DAX.
- Day traders: The DAX index often shows significant fluctuations over the course of a single trading day and could present good options for both short and long positions.
- Long-term investors: Since its introduction in 1988, the DAX index has been on the rise, showing an overall positive trend, peaking in 2013 and 2017.
- German stock traders: When investing in specific stocks in the German market, the DAX could be used as a hedging tool.
- Global investors: Investors who invest in major economies around the world, choosing indices such as the Dow Jones or the FTSE may also include the DAX in their portfolio, as major economies often move in tandem.
What drives the DAX’s price?
- The German economy: While not considered a benchmark for the country’s economy as a whole, the components of the DAX still make up a hefty portion of it. Therefore, country-wide trends could affect the index’s components.
- The EU’s economy: Germany is not only the biggest economy in Europe, but it is also a major economic catalyst for other countries in the region. Therefore, changes that affect the Union as a whole are likely to affect the DAX index as well.
- Significant changes in a single component: Since there are only 30 stocks composing the index, a change in a single stock could affect the index as a whole. For example, electronics giant Siemens composes more than 10% of the index, so a significant swing in its price would impact the DAX.
- Global trends: Since international markets are all connected, and the companies within the DAX conduct business around the globe, it is likely that a major occurrence in another market, or a global trend, would impact the German index.
The DAX doesn’t always reflect the German economy
Many indices are considered to be barometers for measuring the health of their respective country’s economies, especially when there’s one prominent index from a specific country that is often cited. Such is the case with indices such as the British FTSE or the Nikkei 255: when they go up, it often means that their country’s economy is in good condition.
To that respect, the DAX index is an anomaly of sorts. While it will most likely go up if the German economy is booming, there are some unique differentiators that separate it from similar indices:
- The DAX only has 30 companies: Germany is the biggest economy in Europe and the fourth-largest in the world. While the DAX does contain the top 30 corporations in the country, there are still numerous ones that are not part of the index. Therefore, it is possible that the index would go in an opposite direction than the rest of the economy on occasion.
- The index is composed of global brands: There are a lot of well-known names within the index’s composition, such as BMW, Adidas, Siemens and SAP. Obviously, these companies’ business activities expand well beyond Germany’s borders and therefore, could show gains even if there is a slowdown in their domestic operations.
- Germany is part of the European Union: There’s often a close relationship between a country’s index and its currency. For example, since the Japanese economy is heavily dependent on exports, the Nikkei will often go up when the Yen weakens against foreign currencies. However, since Germany shares the Euro currency with other countries in the Union, the connection between the DAX and the currency is not so straightforward.
History of the DAX
The DAX (short for Deutscher Aktienindex or “German stock index" in German), was launched in 1988, as an index that measures the performance of the top 30 companies in Germany. Like most indices, it goes through periodic rebalancing, and many of the components added over the years were later excluded due to various reasons, such as insufficient market capitalisation.
The index was launched at a base value of 1,000 points and has had its ups and downs over the years. In 2015, the index crossed the 12,000 point mark and reached an all-time high in mid-2017. At its highest, the overall market cap of its components topped €970 billion.
Conclusion: The DAX is driven by both foreign and domestic factors
Considering the DAX as an investment option is a good example of the old bulls vs. bears debate. The bulls who believe that the global economy and Germany specifically will continue to grow will keep on investing in it, while the bears will take a more conservative approach. However, for most investors, the DAX is less about the German economy and more about the world - and for a good reason. When looking at the GER30 chart, it is obviously highly affected by global trends, and often displays behaviour similar to that of other leading global indices, even if the German economy is moving in a different direction. However, it is important to note that it is still composed of German companies and could also be driven by factors relating to the country’s economic growth and stability.