On July 1st, 1988 German DAX was published. It was not only an index of the German stock market: It introduced a new methodology computing a stock market index. The German DAX was the first popular index to include weights according to market capitalization and calculating returns including dividends. Now, after 25 years it is time to look back how it performed.

DAX is computed using market capitalization

In the main indices like Dow-Jones Industrial Average or Nikkei 225, the index value is computed based on the notional value of the stocks as weights in summation of the traded prices. This puts high weight on industry and low weight on high-tech companies. Instead, DAX uses the market capitalization as weight. This delivers a more realistic picture of the impact of the trades at the stock exchange.

The constituents of DAX follow a quantitative rule

In contrast to Dow-Jones and Nikkei, the components of DAX are not selected by some newspaper. Instead, they follow quantitative rules like “at least 10% free float” and in the top 35 largest company in market capitalization and in the top 35 in the turnover at Xetra exchange.

The performance of DAX mimics an investment strategy

Dow-Jones, S&P 500, Russel 1000, Nikkei and other indices usually account for stock-splits. But, they do not account for dividends or rights issues. Including these effects, DAX is computed as a total return index. This way, DAX returns deliver a fair estimate for the return of the investment in the corresponding stocks in the index.

DAX computation rule was state-of-the-art

Looking at the new rules for computation, DAX was state-of-the-art and somewhat revolutionary. There were predecessors like S&P 500 with quantitative rules for the constituents and a new but unpopular Dow-Jones Industrial Average Total Return index with a total return computation including dividends. But, the collection of features of DAX was unique. Did this create a unique success, too?

Comparing DAX with Dow-Jones

DAX started at July 1st, 1988 at 1140 such that December 31st 1987 would have had an index value of 1000.

	January 1st, 1988	June 30th, 2013
DAX	1,000.00 EUR (= 1955.83 DEM = 1185 USD)	7,947.00 EUR (= 10,339 USD)
Dow-Jones Industrial Average Total Return	1,945.03 USD	28,785.03 USD
GDP USA	5,512.00 Mio USD	15,232.00 USD
GDP Germany	1,260.00 Mio USD	3,639.00 USD

Looking at this data, Dow-Jones increased with reinvested dividends by 1380% while DAX increased by 694% in EUR resp. adjusted to by 772%. Dow-Jones increased about double as much as DAX in the last 25 years. For comparison: GDP of both, USA and Germany rose about 180% in the same timeframe.

During the last 10 years, both indices reached about the same performance:

Conclusion

The introduction of DAX created a new and highly popular index with many desirable features. However, DAX is just an index and could not prevent the German market being less successful than the US market measured in Dow-Jones Industrial Average (Total Return).