Guide to the DAX 40: Understanding Its Composition and Investment Strategies

The DAX 40 (Deutscher Aktienindex) is the German stock index of the most important Stock Exchange in the European Union and one of the most significant in the world.

stock exchange dax

This index serves as an economic indicator and is used by many analysts. However, it can also be an investment asset. In this article, we show the intricacies about this index: What is the DAX 40? What are its characteristics? How to invest in it?

What is the DAX 40?

The DAX 40 is the German stock index. It Specifically represents the Frankfurt Stock Exchange, the main one in Germany. It is often called DAX alone or DAX Xetra (Xetra is the electronic trading platform of the German Stock Exchange).

Conversely, Germany is the most important economy in the European Union, therefore, this index is of utmost importance for investors and managers of all kinds. It is one of the most important stock indices and acts in all respects as an economic indicator. It is on par with such famous Wall Street indices as the S&P 500 or the Dow Jones 30.

An index's mission is to check the behavior of an entire market as a whole and to know if in general terms a financial market has evolved favorably or not. In this case, the DAX 40 represents the German stock market.

To construct the DAX 40 index, simply take the 40 values with the highest market capitalization from the German market, as a sample of its entire set (hence the number that follows its name) and a weighted average of their quotes is made. Companies are selected based on their market capitalization and turnover (trading volume).

A weighted average means that companies with higher market capitalization have more weight in the index calculation. The selection of shares and the calculation formula are designed to faithfully reflect the general market sentiment.

We understand by market capitalization (or stock market capitalization) the price of the shares multiplied by the number of shares in circulation.

However, this index has a feature that makes it unique: it takes into account the dividends distributed by companies for its calculation. Toically, stock indices do not take this factor into account, only the share price .

History of the DAX 40 and its relationship with the DAX 30

DAX corresponds to the acronym Deutscher Aktienindex. It was created in 1988 (to tell the truth, it came to light on December 31, 1987), with a value of 1,000 points.

It was jointly created by the Association of Stock Exchanges of Germany, the Frankfurt Stock Exchange and the main German newspaper on financial markets Börsen – Zeitung.

Previously there was other index called Börsen – Zeitung, whose creation dates back to 1959. The German DAX 30 was its predecessor, although in its origins it was intended to be a complement.

Throughout its history, this index has suffered the ups and downs characteristic of the global and European economy. Like the Dot-com bubble and the subsequent crisis (in this period it fell 72%), the financial crisis of 2008, the great subsequent recovery, and in recent times, in its graph you can see the notch that the selling panic suffered in February 2020 due to the Covid -19 pandemic has left.

what is dax index

The Wirecard scandal and the expansion to the DAX 40

In 2018, we arrived at the entrance of Wirecard in the DAX 30, a technology company applied to financial services. However, this company, which assured financial transactions at a very low cost, was sustained by debt, increasingly higher debt.

Therefore, after the arrival of the pandemic and the generalized falls in the stock market, its scam was uncovered and it went from being one of the largest companies in market capitalization in Germany, to entering bankruptcy and being worth absolutely nothing.

dax 40 index

This fact was a hard blow for the German financial and stock market. The European engine aspiring to compete with indices such as the S&P 500 or the Nikkei 225, and overnight one of its largest companies became worthless.

As a result, the German regulator was forced to increase the number of participants (because otherwise, the fall of the DAX would have been epic) from thirty to forty, to keep its quotation at the same point. However, from this point on, it would be much more rigorous with the new members of this “new DAX 40” asking them:

  • To have registered a positive operating result in the last two financial years.
  • Quarterly accounts.
  • The creation of an audit body.
  • An annual audit of the company's accounts.

And in general terms, this is how we went from the DAX 30 at the end of 2020, to the DAX 40.

What values make up the DAX 40?

Currently, these are the 40 highest market capitalization values and the highest trading volume that exist in the German Stock Exchange; and together they form the DAX 40:

AdidasDelivery Hero (DHER)Henkel VZO (HEN3)SAP (SAP)
AirbusDeutsche Bank AG (DBK)Infineon (IFX)Sartorius AG (SRT3)
AllianzDeutsche Boerse (DB1)Linde PLC (LIN)Siemens AG (SIE)
BASF (BAS)Deutsche Post (DPW)Mercedes-Benz Group (MBG)Siemens Health (SHL)
Bayer (BAY.DE)Deutsche Telekom AG (DTE)Merck (KRM)Symrise AG (SY1)
Beiersdorf AGE.ON SEMTU Aero (MTX)Volkswagen VZO (VOW3)
BMW ST (BMW)Fresenius SE (FRE)Muench Rueckvers (MUV2)Vonovia SE (VNA)
Brenntag (BNR)Fresenius Medical Care (FME)Porsche Automotion (PAH3)Zalando SE (ZAL)
Continental AG (CON)Hannover Rueck (HNR1)Puma SE (PUM)
CovestroHeidelbergcement (HEI)Qiagen NV (QIA)
Daimler (DAI)Hellofresh SE (HFG)RWE AG ST (RWE)

As seen above, this index lists top-tier companies within their respective sectors. A characteristic of the DAX is that its companies are multinationals with a considerable export volume.

Regarding its sectoral composition, Germany has always been known for having a powerful chemical and automotive industry. However, it does not happen as in other countries where the economy suffers a strong dependence on a single sector.

We can verify, through the iShares Core DAX ETF. how the sectoral structure of the index is balanced:

SectorsSectoral composition
Industry23.59%
Basic Materials6.84%
Cyclical consumer13.39%
Technology 14.82%
Financial services19.08%
Health Care7.96%
Utilities4.28%
Communication6.48%
Real Estate1.50%

If, for example, we contrast the Dax 40 with the FTSE 100 index of the London Stock Exchange, and we observe the difference in terms of the weight of certain sectors. We take as a reference for the sectoral composition of the FTSE 100:

SectorsSectoral composition
Communications3.27%
Consumer Discretionary6.12%
Consumer Staples19.38%
Energy13.02%
Financial service17.67%
Health Care12.32%
Industrials10.04%
Information Technology0.98%
Materials12.29%
Real Estate1.06%
Utilities3.85%

In the Dax 40 index, the Financial and industrial sectors are the major games (42.67%) of the indices while Financial services and Consumer staple form the chunk of the London's FTSE 100 forming 37.05%, almost one-fourth of the index. In the US market something similar happens, it can be checked in S&P 500:.

What are the main companies by market capitalization in the DAX 40 index?

Once seen how the sectoral composition of the DAX 40 is balanced, it is worth asking which are the companies that have the most weight in the calculation of this index.

The German companies with the highest market capitalization are the following:

Company% Asset
SAP SE10.88%
Siemens AG9.74%
Allianz SE7.78%
Airbus SE6.81%
Deutsche Telekom AG6.48%
Munchener Ruckversicherungs-Gesellschaft AG4.52%
Mercedes-Benz Group AG3.99%
Infineon Technologies AG3.95%
DHL Group3.40%
Basf SE3.25%

How does the DAX 40 work?

No company can have a weight greater than 10% in the index since 2006. The data is updated every minute, taking the new prices marked from the Xetra system. Trading sessions run from Monday to Friday from 09:00 hours until the Xetra closing price auction, which begins at 17:30 hours.

The days that the Frankfurt Stock Exchange will be closed in 2024 are as follows:

  • January 1: New Year's Day.
  • March 29: Good Friday.
  • April 1: Easter Monday.
  • May 1: Labor Day.
  • December 24: Christmas Eve.
  • December 25: Christmas Day.
  • December 31: New Year's Eve.

👉 Find out the Stock Exchanges' opening hours or the London Stock Exchange trading hours

The DAX 40 is reviewed annually in the month of September, to change the weights and decide if any value enters or leaves the index. The purpose is to have a faithful representation of the Frankfurt Stock Exchange (the 30 companies that belong to the DAX represent 75% of the market).

How to invest in the DAX 40?

There are several options, depending on the level of capital, the risk you intend to assume, the time horizon of the investment and, in summary, the objectives you intend to achieve by investing in the DAX 40.

Furthermore, everything that is now going to be explained is not only valid for investing in the DAX 40, but it is equivalent to investing in any stock index.

Factors that influence its price

  • National and European situation: The situation in Germany is undoubtedly important in determining how its stock market behaves. But beyond that, Germany is one of the main partners of the European Union and the macroeconomic indicators of the member countries, as well as the political climate, influence its evolution.
  • Global situation: Most of the companies in the DAX 40 also trade in the United States, therefore, it is an index that transcends German borders and is affected by the political and economic situation in the United States. In addition, it is composed of multinationals that have a high volume of exports; the global economic situation, conflicts and trade relations affect the companies that make up this index.
  • Exchange rates: As these are companies that largely depend on exports, the exchange rate of the Euro against other currencies has a high incidence. A weak Euro favors exports, but is detrimental to imports.
  • Decisions of the European Central Bank (ECB): the ECB is the body that ensures price stability. Faced with an inflationary rise, it will react (most likely) by increasing interest rates and, therefore, making access to credit more difficult. All of this leads to slowing down business expansion plans. In addition, the automotive sector depends a lot on the borrowing capacity of individuals.

Investing in the DAX 40 by buying shares

Purchasing physical shares is one of the most traditional ways to invest. It is advisable for long-term investment. It is possible through a broker that gives access to this market (which is not difficult).

However, creating a basket of values with the 40 companies that make up the DAX (or most of it) would be costly in commissions. Creating a diversified portfolio through directly investing in shares requires a volume of capital. Normally, these operations are carried out gradually, making periodic purchases of shares and calculating the weighting to adjust the portfolio.

On the other hand, the investor holds securities that can offer dividends from time to time. In the face of falling share prices, you can even buy more at a better price (this strategy is allowed for investments without financial leverage, as in this case).

Investing in the DAX 40 through futures and financial options

This is the field of derivative instruments, those that are created from a certain asset, called “underlying”. In this case, the underlying asset is the DAX 40 index.

Financial futures are instruments that, as their name suggests, are contracts in which settlement takes place in the future, but the price is determined on the day of contracting. As for options, what is obtained when buying them is the right, but not the obligation, to make the exchange.

The main characteristic of this type of products is that they are leveraged. That is, the investor does not have to deposit the entire operation, but a percentage as a guarantee margin. Leverage acts as a capital multiplier, but also represents a risk.

Furthermore, with financial derivatives there is the possibility of short selling. In other words, selling the asset with the intention of buying it back at a lower price and making profits from any downward fluctuations that the DAX 40 may experience.

It is true that futures and options are complex financial derivatives to understand, however, I leave you an article where you can find the best brokers to trade with financial futures

Financial instrument Index Cap
DAX FuturesIndex*25€
Mini-DAX FuturesIndex*5€
Micro-DAX FutureIndex*1€
DAX OptionsIndex*5€

It is also possible to invest in the DAX 40 through funds and ETFs.

Other European indices to invest in

👉 FTSE 100 – What is it and how to invest in it?: Highlighted as the benchmark British index, it takes you into the financial heart of the UK. Discover how this leading indicator reflects the economic status of the nation and its global influence.

👉 The CAC 40 – What is it and how to invest in it?: The leading index of the Paris Stock Exchange, transports you to the economic heart of France. Explore its history, the composition of its companies and its importance in the European and global context.

👉 The IBEX 35 – What is it and how to invest in it?: The star index of Spain, invites you to explore the performance of the 35 main companies of the Madrid Stock Exchange. Discover how this indicator affects the Spanish economy and international investments.

So far, all the relevant information for you to know what the DAX 40 is, and why you should invest in it, after all, not only American stocks exist. In addition, a good portfolio is important to include stocks from the best indices in the world, among them the DAX 40.

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FAQs about Dax 40

How is the DAX Weighted

The DAX is capitalisation weighted, which means that the stocks with a higher market capitalisation will find a greater influence on the overall index. Representation on the Germany 40 is capped at 10% to prevent any single stock from dominating the index.

How is the DAX calculated?

The DAX is a capitalization-weighted index, implying that companies with a higher market cap will have a bigger influence on its price. It’s calculated using a free-float methodology, which means it only takes the number of readily available shares into account – ignoring those that can’t be bought and sold (such as those held by government).
Prices are calculated every second, and companies are added or removed quarterly on the basis of their market cap and the size of their order book.

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