How to Invest in the DAX

The DAX is considered the benchmark of Germany’s economy, which has produced numerous internationally known companies. This guide from moneyland.ch answers the most important questions related to investing in the most important German stock index.

What is the DAX?

The Deutscher Aktienindex (DAX) is the most important German stock index. It includes the 40 biggest, most liquid German stocks, based on market capitalization.

From a Swiss perspective, the DAX could be compared to the Swiss Market Index (SMI). But there are differences. The DAX tracks 40 stocks, so it is more diversified than the Swiss SMI which tracks just 20 companies. Additionally, the DAX index that is commonly cited by the media is a performance index, which sets it apart from price indexes like the SMI. That sets the DAX apart from other major stock indexes. The indexes’ performance accounts for dividends, which is not the case with price indexes. The industry sectors that dominate the DAX are technology, finance, chemicals and pharmaceuticals, and the automobile industry.

Table 1: The ten DAX companies with the heaviest weighting

Weighting data from Stoxx as per 20.10.2023.

The DAX limits weighting to a maximum of 10 percent, so no one stock included in the DAX can make up more than 10 percent of the index. However, the index is corrected on a quarterly basis, so it is possible for a stock to temporarily surpass the threshold.

The DAX sits at the top of a whole family of indexes. The next indexes in line, based on the size of the companies they track, are the MDAX with 50 mid-sized companies, and the SDAX with 70 smaller companies. In addition to these, there is also the TecDAX which specializes in technology companies. The HDAX includes all of the stocks in the DAX, MDAX, and TecDAX. The CDAX includes more than 400 companies with general standard and prime standard listings on the Frankfurt Stock Exchange. The CDAX is the most widely-diversified German stock index, and is comparable with the Swiss Performance Index (SPI).

How accurately does the DAX represent the German stock market?

The DAX is considered to be the leading German stock index. The 40 companies tracked by the index collectively make up around 80 percent of the total market capitalization of all companies listed on German stock exchanges. But it also excludes numerous companies. Compared to the S&P 500 index in the US (500 stocks), and the main indexes in Japan (225 stocks) and the United Kingdom (100 stocks), the DAX is not broadly diversified.

How can I invest in the DAX?

There are a number of ways to invest in the DAX. These options are available:

• Individual stocks tracked by the DAX
• DAX ETFs
• Actively-managed mutual funds
• DAX tracker certificates
• Fund savings plans that use DAX mutual funds or ETFs
• Digital asset management services (robo advisors) that invest in DAX stocks

Which ETFs can I use to invest in the DAX?

Exchange-traded funds (ETFs) provide a relatively cheap way to invest in the entire DAX stock index. These are passively-managed funds which replicate stock indexes like the DAX. The costs of ETFs, shown in the total expense ratio (TER), is low compared to the costs of actively-managed mutual funds.

The shares of ETFs are bought and sold on stock exchanges just like the shares of company stocks, so you can buy and sell ETF shares during trading hours. In order to invest in ETF shares, you need to have a stock brokerage account. You can reduce the brokerage costs by using an affordable online stock broker.

Table 2: DAX ETFs sorted by TER

The ETFs listed in the table above all use full physical replication. That means the fund actually holds real shares in DAX companies, instead of replicating the index synthetically using swaps. Physically-replicating ETFs are considered more secure than synthetically-replicating ETFs.

If you want to grow your capital over a long investment term, then accruing ETFs are normally a better choice. Dividends are automatically reinvested back into the fund. If, on the other hand, you want to receive a regular income from your investment, then an ETF that distributes dividends is a better fit. In this case, the dividends are paid into your bank account. From a tax perspective, it is advantageous to use an ETF domiciled in Luxembourg or Ireland.

How much do ETFs cost?

The cost of an ETF is shown in its total expense ratio (TER). If an ETF has a TER of 0.1 percent, then you will pay the fund managers an amount equal to 0.1 percent of your invested capital every year.

There are other costs which apply in addition to the TER. These include taxes and duties, stock exchange fees, and your bank’s brokerage fees and custody fees. The exact costs can vary broadly depending on which stock brokerage account you use.

What are the advantages of investing in the DAX?

DAX ETFs are a simple and cheap way to invest in the 40 German companies that together make up 80 percent of the German stock market’s capitalization. Nearly all of the companies included in the DAX operate on an international scale. Many of them have a strong brand presence outside of Germany as well. Additionally, some DAX companies pay out attractive dividends. The wide range of industry sectors represented by the DAX is another advantage.

What are the disadvantages of investing in the DAX?

The disadvantage of investing in the DAX is that it includes relatively few companies. Although the DAX does cover the bulk of the German stock market in terms of market capitalization, it only includes a small portion of the more than 400 companies listed on German stock exchanges. Other indexes, like the S&P 500, are much more broadly spread out. Many DAX companies are dependent on industry and exports, which exposes them to geopolitical risks.

The fact that the DAX, being a performance index, accounts for dividends, skews the value represented by its index rate compared to price indexes like the Swiss SMI or the Japanese Nikkei 225. A look at historical developments shows that if you only account for stock prices, the DAX has delivered lower performance than the SMI. When compared with a Swiss performance index, the Swiss Market Index Total Return (SMIC), the Dax has performed notably worse (see table 3).

Table 3: Performance comparison of the DAX and the SMI

Data source: Investing.com. Performance figures are based on the closing prices of the first trading days in October 2018 and October 2023. The same dates apply to the currency exchange rates used for calculations.

Conclusion

ETFs that track the DAX are a simple and affordable way to invest in the most important German stock index and the biggest German companies. When investing with ETFs, it is important to keep your investment costs as low as possible. It is also important that you do not invest all or most of your capital in a DAX ETF, but only use it as one of many components to diversify your investment portfolio. That is because the DAX, with its 40 companies, is not broadly diversified. If you want to spread your capital out across a broader range of German stocks, then the MDAX or the SDAX are more suitable. Ideally, your portfolio should cover many different industry sectors, countries, and regions.

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