One year of Dax reform: more class or just more mass?

On September 20, 2021, Deutsche Börse initiated a reform of the Dax, the index of German standard stocks, and expanded the first German stock exchange league from 30 to 40 members.

In addition, since then, stricter rules have applied to companies that are supposed to move up to the index and stay there.

The balance after one year Dax 40 is mixed.

"The broader diversification is to be seen positively," says the managing director of the Center for Financial Studies at Frankfurt's Goethe University, Volker Brühl.

“However, it is to be criticized that the topic of sustainability/ESG still plays almost no role in the Dax.

It just doesn't fit in today's world.” Criteria such as the environment, social issues and good corporate governance - ESG for short (Environmental Social Governance) - are becoming increasingly important for private and professional investors.

"An opportunity was missed to make the Dax greener," says Brühl.

“This is a design flaw that needs to be fixed urgently.

Every company that is included in the Dax should achieve a specific sustainability ranking, an ESG score.”

Andreas Strobl, Head of German Equities in Wealth & Asset Management at private bank Berenberg, also criticizes the lack of consideration of ESG criteria.

His conclusion: "The Dax expansion was definitely a coherent development - but it remains more of an evolution than a revolution."

For a long time, the Dax, which has existed since 1988, was dominated by four sectors: chemicals, automotive, energy and finance.

According to Deutsche Börse, the opening up to other companies should also ensure that up-and-coming internet companies, for example, get a place in the showcase of the German economy.

A year ago, the German-French aircraft manufacturer Airbus was added as another heavyweight in the Dax.

Also the chemicals dealer Brenntag, the cooking box supplier Hellofresh, the holding company Porsche, the sporting goods manufacturer Puma, the biotechnology and diagnostics company Qiagen, the pharmaceutical and laboratory supplier Sartorius, the medical technology group Siemens Healthineers, the flavor and fragrance manufacturer Symrise and the online fashion retailer Zalando.

“The quality of the Dax has improved.

Significantly more sectors are now mapped.

As a result, the Dax has a broader base and more diversification,” says Ingo Speich, Head of Sustainability and Corporate Governance at Deka Investment.

"The range of companies in the German economy is now better covered by the expansion," agrees Marc Decker, deputy head of shares at Quintet, the parent company of Merck Finck.

“However, the increase remains only a tentative attempt to redesign the still industrial-heavy Dax.

Furthermore, companies from the IT sector in the broadest sense remain in short supply in the leading German index.”

Greater interest abroad

Tom Koula, index expert at Stifel Europe Bank, also believes that there are still a few innovative companies that could be of interest to the Dax: "In particular, this is the Mainz-based vaccine manufacturer Biontech.

A look at the southern German start-up Lilium, which develops air taxis, is also exciting.

Both companies are listed on the US technology exchange Nasdaq, but are irrelevant on the home exchange in Germany.”

The increase a year ago "got a lot of attention internationally," Koula sums up.

"Especially in the USA, interest has increased, even if this is not currently reflected in the index development due to the current political and economic situation - war, inflation, energy crisis, weak euro." Expert Decker also says that the Dax belongs internationally the relevant share indices, "although globally active investors are of course aware of its limited focus on growth stocks".

"More continuity would be desirable"

One of the growth stocks that was only included a year ago, Hellofresh, has already had to say goodbye to the first German stock exchange league.

The higher stock market value washed the energy company Siemens Energy back into the Dax on September 19 of the current year.

In a generally changeable stock market environment in 2022, the shares of the Dax climbers Hellofresh and Zalando, among others, fell significantly.

Both companies have lost more than 70 percent of their stock market value since their inclusion in the Dax a year ago.

“There is still quite a bit of ups and downs in the composition of the Dax.

More continuity would be desirable,” says Professor Brühl from Frankfurt.

"To be fair, however, it has to be said that the frequent changes recently are also due to the high volatility."

After the fraud scandal and the delayed expulsion of the Munich payment service provider Wirecard from the Dax, Deutsche Börse decided to only include profitable companies in the Dax.

Uwe Streich, equity strategist at Landesbank Baden-Württemberg (LBBW), believes that these rule changes should definitely be viewed positively: they are probably one of the best things about the Dax reform.