DAX40: Investing in German Blue Chips

DAX40 : D1, 2024.12.23

The DAX40 Index, also known as the Deutscher Aktienindex, is a key barometer of the German stock market and one of the most important stock indices in Europe. It includes the 40 largest German companies listed on the Frankfurt Stock Exchange, playing a significant role not only in the local market but also globally. The index is highly popular among investors and traders worldwide due to its volatility and the opportunities it provides for CFD trading.

The History of the DAX40

The DAX40 Index was created in 1988 with a base value of 1,000 points. It was established as a joint initiative by the German Stock Exchange Association, the Frankfurt Stock Exchange, and the Börsen-Zeitung newspaper. The DAX40 reflects the performance of the 40 largest German companies, with their weightings in the index determined by market capitalization and trading volume. Its design has made it one of the most vital indicators of the German economy.

Charakterystyka indeksu DAX40

The DAX40 Index includes the 40 largest publicly traded German companies, many of which are global corporations. Examples include Siemens, Allianz, and SAP, all operating worldwide. These companies account for a significant portion—around 80%—of the total market capitalization of the German stock exchange. The index components are selected based on free-float-adjusted market capitalization (only shares available for public trading are considered) and trading volume. This mechanism ensures that the index comprises the largest and most liquid companies in the German market.

Trading CFDs on DAX40

Contracts for Difference (CFDs) enable speculation on DAX40 price movements without owning the underlying assets. CFDs allow traders to open both long (buy) and short (sell) positions. This instrument is popular among traders due to its features:

• Leverage: CFDs enable controlling large positions with relatively low initial capital. However, leverage increases the risk of losses.

• Trading flexibility: CFDs on DAX40 are available nearly 24/7, allowing reactions to global market events.

• Lower transaction costs: Compared to futures, CFD trading can be more affordable, especially for retail investors.

However, CFDs do not provide ownership of the underlying assets and incur financing costs for overnight positions.

Trading Futures on DAX40

DAX40 futures, available on the Eurex exchange, are among the most popular derivatives in Europe. Futures are agreements obligating buyers and sellers to execute transactions at a predetermined future date and price.

• FDAX: The standard DAX future contract with a multiplier of 25. At an index value of 15,000 points, the contract value is €375,000.

• Mini-DAX (FDXM) and Micro-DAX (FDXS): Versions with multipliers of 5 and 1 are available for investors with smaller capital.

Advantages of DAX40 Futures:

• High liquidity: DAX40 futures are among the most traded instruments on Eurex.

• Leverage: Similar to CFDs, futures allow increased exposure with smaller capital.

It is worth noting that futures require a margin deposit, which varies depending on market volatility. DAX40 futures contracts expire quarterly: March, June, September, and December.

Investing in DAX40 via ETFs

ETFs (Exchange-Traded Funds) track the performance of the DAX40 index and provide a simple and efficient way to invest in the German economy.

Examples of ETFs:

• iShares Core DAX UCITS ETF

• Xtrackers DAX UCITS ETF

• Amundi DAX UCITS ETF

Advantages of ETFs:

• Diversification: Investors gain exposure to all the index’s companies in a single transaction.

• Low costs: ETF management fees are lower than actively managed funds.

• Ease of trading: ETFs can be bought and sold during stock market hours, just like shares.

DAX40 Price Dynamics

The DAX40 price can be analyzed in two main contexts: the spot market and the derivatives market.

a. Price During German Trading Hours

During German trading hours, the DAX40 spot price reflects the current value of the companies in the index. Simultaneously, futures contracts are traded on the derivatives market, where their price results from the current supply and demand for these contracts. However, the price remains close to the theoretical value derived from the spot price, interest rates, and expected dividends.

• Arbitrage: When futures prices deviate from spot values, professional investors can execute arbitrage. This involves simultaneously buying (or selling) a futures contract and a corresponding basket of stocks, correcting the price discrepancies.

• Arbitrage challenges: The DAX40 is a theoretical construct, so arbitrage requires buying or selling all 40 constituent stocks, generating additional costs and risks.

b. Price of Futures Contracts Outside German Trading Hours

Outside Xetra trading hours, DAX40 futures prices are shaped by supply and demand. The lack of arbitrage with the spot market means prices may respond more strongly to global events (diverging further from theoretical values), such as correlations with U.S. indices (S&P 500, Nasdaq) or OTC transactions before and after the European trading session.

c. Factors Influencing DAX40 Prices

• OTC trading: Pre-session OTC transactions can impact futures prices.

• Global market correlation: After the European market closes, the DAX40 often exhibits strong correlations with U.S. markets.

The Impact of the Largest Companies on the Index

As of December 19, 2024, the following tables illustrate the influence of the largest companies on the DAX40 Index and the number of companies with a dominant impact on the index. These data were calculated using current values sourced from tradingview.com.

Table 1: The Influence of the Five Largest Companies on the DAX40

Sym.	Company Name	Price	Market Cap	Weight	Sector
SAP	SAP SE	233.40 EUR	286.64 B USD	10.00%	Technology services
SIE	Siemens AG	187.22 EUR	153.72 B USD	8.35%	Producer manufacturing
DTE	Deutsche Telekom	28.84 EUR	150.62 B USD	8.18%	Communications
AIR	Airbus	153.60 EUR	128.35 B USD	6.97%	Electronic technology
ALV	Allianz SE	291.80 EUR	118.26 B USD	6.42%	Finance
SUMA	-	-	-	39.92%	-

Source: tradingview.com, own calculations, as of December 19, 2024

The above table demonstrates that the five largest companies in the DAX40 index currently account for 40% of its level. The influence of SAP can temporarily exceed 10% (it should periodically be adjusted to 10%). Tracking information about these companies gives us a 40% understanding of the DAX40 index—a significant amount, though perhaps not enough. Therefore, we will now examine the influence of the 10 largest companies on the DAX40 index.

Table 2: The Influence of the Ten Largest Companies on the DAX40

Sym.	Company Name	Price	Market Cap	Weight	Sector
SAP	SAP SE	233.40 EUR	286.64 B USD	10.00%	Technology services
SIE	Siemens AG	187.22 EUR	153.72 B USD	8.35%	Producer manufacturing
DTE	Deutsche Telekom	28.84 EUR	150.62 B USD	8.18%	Communications
AIR	Airbus	153.60 EUR	128.35 B USD	6.97%	Electronic technology
ALV	Allianz SE	291.80 EUR	118.26 B USD	6.42%	Finance
MUV2	Munich Re	492.40 EUR	69.57 B USD	3.78%	Finance
MRK	Merck KGAA	136.45 EUR	62.37 B USD	3.39%	Health technology
SHL	Siemens Health.	51.96 EUR	60.67 B USD	3.30%	Health technology
IFX	Infineon	31.01 EUR	42.98 B USD	3.22%	Electronic technology
DB1	Deutsche Boerse	222.00 EUR	42.31 B USD	3.01%	Finance
SUMA	-	-	-	56.62%	-

Source: tradingview.com, own calculations, as of December 19, 2024

Table 2 shows that the 10 largest companies account for 56.6% of the DAX40 index composition, with 25% of the companies contributing to over 56% of the index's value. If we are interested in an indicator that largely determines the DAX40 index, the performance of the aforementioned companies provides a fairly accurate picture of this index.

Impact of 70% and 80% on the DAX40 index

Fifteen of the largest companies account for 70% of the DAX40 index, while the twenty largest companies determine over 80% of its composition. The influence of subsequent companies on the index decreases to 1.67% for the 21st company. The impact of companies ranked 21st to 31st ranges between 1.67% and 1%. The smallest companies in terms of capitalization have an influence of less than 1% on the index.

Table 3: The Influence of Technology on the DAX40 Index (Technology Services + Electronic Technology)

Sym.	Company Name	Price	Market Cap	Weight	Sector
SAP	SAP SE	233.40 EUR	286.64 B USD	10.00%	Technology services
AIR	Airbus	153.60 EUR	128.35 B USD	6.97%	Electronic technology
IFX	Infineon	31.01 EUR	42.98 B USD	2.33%	Electronic technology
RHM	Rheinmetall	602.20 EUR	27.76 B USD	1.51%	Electronic technology
MTX	MTU Aero Engines	317.90 EUR	18.00 B USD	0.98%	Electronic technology
SUMA	-	-	-	21.79%	Technologia

Source: tradingview.com, own calculations, as of December 19, 2024

The technology sector has the largest share of the index, though it is worth noting that it is highly diverse. A representative of typical IT (software) is SAP, currently the largest company in the DAX40 index. The sector also includes an aerospace company, a semiconductor firm, and a representative of the German defense industry.

Table 4: The Influence of the Consumer Goods Sector on the DAX Index

Sym.	Company Name	Price	Market Cap	Weight	Sector
MBG	Mercedes-Benz Group	53.16 EUR	59.27 B USD	3.22%	Consumer durables
P911	Porsche AG	58.40 EUR	55.36 B USD	3.01%	Consumer durables
BMW	BMW	77.28 EUR	50.06 B USD	2.72%	Consumer durables
VOW3	Volkswagen	88.90 EUR	45.93 B USD	2.49%	Consumer durables
DTG	Daimler Truck	36.50 EUR	30.40 B USD	1.65%	Consumer durables
CON	Continental	63.90 EUR	13.30 B USD	0.72%	Consumer durables
PAH3	Porsche Automobil Holding	35.89 EUR	11.30 B USD	0.61%	Consumer durables
SUMA	-	-	-	13.42%	Consumer durables

Source: tradingview.com, own calculations, as of December 19, 2024

The consumer goods sector, with a 13.42% share, is more homogeneous. It is dominated almost exclusively by car manufacturers, with the exception of Continental, a producer of car tires, which is also categorized within the automotive industry.

Table 5: The Influence of the Financial Sector on the DAX40 Index

Sym.	Company Name	Price	Market Cap	Weight	Sector
ALV	Allianz SE	291.80 EUR	118.26 B USD	6.42%	Finance
MUV2	Munich Re	492.40 EUR	69.57 B USD	3.78%	Finance
DB1	Deutsche Boerse	222.00 EUR	42.31 B USD	2.30%	Finance
DBK	Deutsche Bank	16.06 EUR	34.25 B USD	1.86%	Finance
HNR1	Hannover Rueck		30.83 B USD	1.67%	Finance
VNA	Vonovia SE	29.14 EUR	24.55 B USD	1.33%	Finance
CBK	Commerzbank		19.11 B USD	1.04%	Finance
SUMA	-	-	-	13.29%	Finanse

Source: tradingview.com, own calculations, as of December 19, 2024

Another significant sector is Finance, which accounts for over 13% of the DAX40 index. The largest company in this group is the German insurer Allianz, alongside another insurance company, the German stock exchange, and Deutsche Bank.

In addition to the sectors mentioned above, it is worth noting the Health Technology sector (10.07%), represented by companies such as Merck and Siemens Healthineers, as well as the Producer Manufacturing sector (12.71%), with companies such as Siemens AG, Siemens Energy, and BASF.

Dominant Influence on the Index

In summary, the five largest companies in the index have the most significant impact, currently accounting for nearly 40% of its composition. The ten largest companies hold a share that significantly exceeds 50%. Half of the companies in the index, those with the largest capitalization, determine 80% of the index's composition.

It is also worth analyzing the DAX40 from the perspective of individual sectors, where the leaders are the technology, finance, and automotive sectors.