By Serkan Batir, Managing Director, DAX indices
Germany’s DAX® index family will have its methodology adjusted to update the treatment of corporate actions such as dividend payments and spin-offs. A proposal to increase the weighting limit of index components to 15%, from 10% currently, won’t go ahead.
Qontigo announced the changes in a statement on June 7. They follow a market consultation between April 11 and May 19 this year to hear from stakeholders on proposals aimed at bringing the indices more in line with international standards, ensure replicability and improve representativeness.
A majority of respondents backed four proposals to change the treatment of corporate actions.
As part of the new rules, total-return indices such as the flagship DAX® will reinvest dividend payments across the entire index instead of in the distributing security.
In the case of company spin-offs, the separated unit will be considered for extraordinary addition to the index based on existing qualification rules and requirements, speeding up the process relative to current rules.
One more modification to the methodology will allow for changes in the number of shares of index constituents at any time during the year, rather than only during index rebalancings as is the case now.
To address these changes in share-count adjustments and corporate actions handling, the index calculation formula will move from a correction-factor-based scheme to a divisor-based one.1
All changes will come into force within the next 18 months. The new index methodology will be published in due time before the implementation of the changes.
As of the regular index review in September 2022, a business forecast file with the index component weightings will be published five days in advance of the effective review, rather than the two days’ notice currently in place. The index component weightings will be implemented as stated in the business forecast file.
No changes to weighting cap
A majority of respondents rejected a proposal to lift the weighting cap for constituents of DAX Selection Indices. One cited reason for rejecting the proposal was the fear of rising concentration risk in single stocks. Many active-manager respondents said increasing the ceiling to 15% would go against European Union rules under UCITS, which limit the weight of any fund’s constituent to 10% of the total.
Indices’ methodology evolves
In 2020, the DAX family underwent its biggest rules enhancement since inception to bolster the quality of member companies and align selection criteria with international practices.
As part of those changes, only candidate companies that have been profitable for the two most recent years are now eligible for admission into the blue-chip DAX.2 The benchmark also grew to 40 from 30 stocks as part of the overhaul. The new rules strengthen the methodology behind the German Selection Indices, and further underpin the attributes that have made the DAX the undisputed benchmark for German stocks and a reliable barometer for Europe’s largest economy.
1 Each index has a unique index divisor, which is adjusted to maintain the continuity of the index’s values across changes due to corporate actions.
2 This requirement is for companies that are not yet DAX constituents. Existing DAX members that have negative profitability can stay in the index. The requirement applies for the main DAX and is not extended to the MDAX, SDAX or TecDAX.
Qontigo’s index provider STOXX Ltd. is the administrator of DAX indices under the European Benchmarks Regulation.