As of Sept. 24, Deutsche Boerse AG is changing the composition of the DAX indices for German small- and mid-sized companies and technology shares to better reflect the size and sector representation of those markets and bring rules in line with international standards.
Following a market consultation, Deutsche Boerse will eliminate a sector segregation that restricted technology shares from entering the MDAX® and SDAX®, respectively gauges for mid- and small-caps. As a result, the MDAX will grow to 60 from 50 constituents, and the SDAX will be expanded to 70 from 50, the index compiler said in a statement.
Deutsche Boerse will also remove a separation by size and liquidity (order book volume) to allow technology stocks currently in Germany’s blue-chip DAX® into the TecDAX®. The inclusion of large caps will not alter the number of TecDAX constituents, the statement said.
The indices are part of Deutsche Boerse’s suite of benchmarks, which cover equity and fixed-income markets as well as a range of strategies.
Representation and liquidity
While the benchmark DAX doesn’t have industry entry restrictions, only companies from sectors classified as ‘classic’ (i.e. ‘non-tech’ industries) have so far been eligible for inclusion in the MDAX and SDAX. Before the revision, technology companies were eligible for the TecDAX only.
Expanding the number of MDAX and SDAX constituents “ensures the indices are representative and continues to safeguard the high level of liquidity and tradability,” Deutsche Boerse said.
Transition period
The new methodology will be applied for the first time in the creation of the eligibility ranking list published on the third trading day of September and will be reflected in the index calculation of the MDAX, SDAX and TecDAX as of Sept. 24 this year. Starting on Jun. 18, ‘shadow indices’ simulating the behavior of the new-rules MDAX, SDAX and TecDAX will be made available.
Traditionally, MDAX has included the 50 ‘classic-industries’ companies that follow after DAX companies in terms of free-float market capitalization and turnover. SDAX has included the 50 companies that follow after MDAX components.
Effects on returns
In an analysis presented in January of how the new rules would affect portfolio performance, the expanded SDAX showed a significant enhancement in returns following the addition of technology shares. The enlarged SDAX returned an annual 23.9% in the five years to Aug. 2017, the data showed, compared with an annual return of 16.8% for the current SDAX.
The enlarged MDAX returned an annual 17.3% in the five years analyzed, compared with 16.7% for the current MDAX.
The new TecDAX, however, saw a decrease in returns with the inclusion of large-capitalization stocks. It returned 22.9% per annum in the five years of the analysis, less than the 24.2% for the incumbent TecDAX.