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Why even a Dax 40 hardly helps with diversification

I.n these days, many investors are not only watching the ups and downs of the Dax, but also the possible change in the German selection index, which has come under criticism mainly due to the insolvency of Wirecard. Until November 4, Deutsche Börse will be asking market participants for their opinions on, among other things, an index expansion and higher quality requirements. Anyone interested can express themselves. The result is expected three weeks later, with implementation in spring 2021.

So far, a mixed picture has emerged with regard to a possible increase in the circle of index members from 30 to the proposed 40. It is positively noted that the index has so far hardly adequately reflected the German economy due to the rather small number of individual values ​​internationally and that its index weight would be lower. The rejuvenation of the Dax is also mentioned. Critics warn that the Dax would not be representative even with ten shares more and that other indices would be weakened.

Heavy weight would remain

If the Dax actually got 40 members, then the number of values ​​listed there would increase by a third in purely mathematical terms. The share of the new companies in the index would still be only 8 percent, says Michael Bissinger, analyst at DZ Bank. Because of the high weight of a few large corporations such as SAP, Linde, Siemens and Allianz, hardly anything would effectively change.

The industry mix would also only change insignificantly and a higher Dax weighting of, for example, technology stocks would probably not be achieved, says Bissinger. The proportion of chemical, automotive and industrial groups among the large German stock corporations is too high for that. The importance of industrial and health titles would probably grow. The larger volume, the slightly higher diversification and the slightly increasing share of dynamically growing companies would be positive for the Dax. Overall, however, the impact on share price development would only be limited.

It doesn’t matter whether the Dax contains 30 or 40 shares, says the Hamburg-based Sutor Bank. Retail investors should better bet on other, more broadly diversified stock indices. This not only reduces the risk, but could also improve the performance of the investments. Because the alpha and omega of investing is diversification. The discussion as to whether the Dax will become more “investable” with 40 individual stocks and further adjustments should not deceive investors. Even with this, no reasonable risk diversification is possible.

Above all, because German investors already have a particularly pronounced “home bias”, that is, they rely primarily on the home market and well-known brands, more diversification is necessary, says the Sutor Bank. An index like the H-Dax currently comprises 99 values. In addition to 30 Dax shares, this also includes the M-Dax and Tec-Dax. A broad diversification does not have to mean a disadvantage in terms of returns. While the Dax gained 107 percent over ten years, the H-Dax came to 126 percent.

Germany is lagging behind internationally

But Germany lags behind in international comparison. Even if you put all German listed companies together, they would have a share of market capitalization in the world of only 4.8 percent, says the Sutor Bank. The largest company at all is Apple with a current market value of 2071 billion dollars. The only German company among the 100 largest stock corporations in the world is SAP with $ 192 billion in 47th place. Siemens follows in 102nd place.

So investors should look beyond the German horizon, advises the Sutor Bank. A stock index such as MSCI World shows around 1650 values ​​from industrialized countries, the MSCI All Countries World even includes around 3,000 values ​​from emerging countries. For comparison: Both the Dax and the MSCI World increased by around a quarter last year. Investors can bet on such markets with exchange-traded index funds (ETF) and certificates. This is not a problem with Dax and MSCI World, but other indices are missing so far.

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