• Regular reviews of the DAX indices for changes
• Clearly defined criteria for inclusion in indices
• Market capitalization determines rise and fall
The indices of the DAX family are regularly checked to see which companies have to leave an index or are new to it. How and when these adjustments are made is strictly defined. This is also necessary because the rise or fall of a company often affects the share price of the value and can also move an entire market.
Set criteria for DAX family
Every company has to meet certain criteria to be included in an index of the DAX family. The candidates must meet the transparency requirements “General Standard” or “Prime Standard”. Which transparency standard a company wants to meet is already decided in the course of the IPO on the Frankfurt Stock Exchange. This is about which post-admission obligations a company wants to impose on itself after its IPO. There is also the “Entry Standard”, but this is not sufficient for inclusion in a selection index.
Another criterion is the company’s listing on the Regulated Market of the Frankfurt Stock Exchange, and the shares must be continuously traded on the XETRA electronic platform. In addition, a company in the DAX family must have its legal seat or operational headquarters in Germany. For foreign companies, a legal domicile in an EU or EFTA country or an operational headquarters in Germany is sufficient. Last but not least, at least ten percent of the company’s shares must be in free float. Those who meet these conditions therefore potentially have the opportunity to be included in a selection index of the DAX family.
However, several hundred companies now meet the first three of these criteria, but there is not that much space in the indices, so how is it decided who actually ends up in DAX & Co.?
DAX, MDAX, SDAX and TecDAX
There was a far-reaching reform here in 2021. As a result, promotion to an index in the DAX family now only depends on the market capitalization of the shares in the company in question. Before that, another criterion was stock exchange turnover. However, there is a minimum turnover that must be met. The 40 members of the leading German index DAX are also the 40 largest companies on the German stock market. According to Deutsche Börse, they represent “around 80 percent of the market capitalization of listed stock corporations in Germany”. This is followed by the MDAX, which lists the 50 largest stocks after the DAX, followed by the SDAX, which has 70 members and in turn maps the 70 largest companies after the MDAX. An exception is the TecDAX, which focuses on tech stocks and lists them according to their size, it counts 30 stocks. There are also companies that can be listed in the DAX and TecDAX at the same time.
Regular entry and regular exit
Several times a year, it is checked which companies meet the criteria and which have to leave an index again. There are two different approaches to evaluating companies. There is the regular review, which takes place twice a year for the DAX, MDAX and TecDAX, namely in March and September. The SDAX is regularly checked every three months. A company can end up in the DAX according to the regular entry rule if it ranks at least 40th in terms of market capitalization (90th in the MDAX, 160th in the SDAX and 30th in the TecDAX). The change is carried out when there is an index value that ranks 47th in the DAX (97 in the MDAX, 167 in the SDAX and 35 in the TecDAX), which must then leave the index.
According to the Deutsche Börse, a company can be removed from the DAX according to the regular exit regulation if it is no longer in the top 53 (top 103 in the MDAX, 173 in the SDAX and 40 in the TecDAX). A change is made when a company that is not part of the index has at least a rank of 47 in the DAX (97 in the MDAX, 167 in the SDAX and 35 in the TecDAX) and can therefore take the place of the company that is leaving.
Fast Entry and Fast Exit
Then there is the stricter fast-exit or fast-entry procedure, where adjustments can also be made every three months. A company is included in the DAX with the help of rapid entry if it is ranked 33rd in terms of market capitalization (ranked 83rd in the MDAX, 153rd in the SDAX and 25th in the TecDAX). The index value that has a lower rank than 47 in the DAX (97 in the MDAX, 167 in the SDAX and 35 in the TecDAX) must then go for the newcomer.
A fast exit occurs when a DAX stock is no longer among the top 60 companies (ranked 110 in the MDAX, 180 in the SDAX and 45 in the TecDAX). Here, too, a non-index company slips down, which has at least 47th place in the DAX in terms of market capitalization (97 in the MDAX, 167 in the SDAX and 35 in the TecDAX). In addition, there are extraordinary adjustments in special cases such as mergers, insolvencies or in the event that the number of shares in free float is significantly reduced.
Additional DAX criteria after the DAX reform
Since the DAX reform in September 2021, there have also been some additional criteria that apply to (potential) DAX companies. For example, in order to be included in the leading German index, a company must have had a positive EBITDA in the previous two years. In addition, since March 2021, the Corporate Governance Code must be complied with, which regularly checks whether the management is complying with the officially recommended principles of good corporate governance. In addition, the provision was introduced that (potential) DAX companies must publish annual reports and quarterly presentations on a quarterly basis.
Announcement of Index Adjustments
According to the Frankfurt Stock Exchange, the date on which index changes will be announced has also been set. The adjustments are published on the third working day in March, June, September and December after the US stock exchange closes (10 p.m. CET). The ranking of the companies on which the changes are based is then based on the closing price of the previous Friday. The changes are then implemented approximately three weeks after the announcement, namely on the Monday after the third Friday of the review month. Since the rules for the composition of the index are clearly and transparently defined, anyone can basically try to find out in advance which companies are moving up or down. The selection process for the companies in the indices is also completely automated.
Implementation of the index changes
If the adjustment has been officially carried out, the index is reassembled, the mathematical process behind it is called concatenation. Here the closing price on the third Friday of the review month forms the basis for the new weighting in the index. Distributions and changes in capital are also included in this calculation. The said dates are precisely coordinated with the expiration dates on the Eurex futures exchange, so that the affected index futures and options expire on exactly the said Friday. The adjustments will then take effect on the following trading day. However, the new composition not only includes the new companies in the stock market barometer, the corresponding key figures of the index are also updated quarterly and the weighting of a value is capped at a maximum of ten percent. This is to prevent one company from dominating the entire index.
Editorial office finanzen.net
Image sources: Pavel Ignatov / Shutterstock.com, Stonel / Shutterstock.com