Forget VW Emissions: The DAX Index Is Germany’s Biggest “Cheat”!

Why investors shouldn’t give up on the FTSE 100 (INDEXFTSE:UKX) for the DAX PERFORMANCE-INDEX (INDEXDB:DAX).

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Some years ago, my sister-in-law and her husband settled in Germany, with good careers, a good life and a new baby. They made an appointment with a financial adviser at the bank, with a view to putting a bit of regular money into the stock market to build a pot for their daughter to give her a start in adult life.

They had no knowledge about investing in equities, or passion or time for learning about the subject, and asked my advice ahead of the meeting with the bank. I gave them the standard Motley Fool recommendation for people in their position: go for a low-cost index tracker.

Having imparted the advice, it occurred to me that I should probably actually have a look at the record of the DAX index — Germany’s equivalent of the FTSE 100. Well, I knew that Germany was the eurozone’s powerhouse, but I was thoroughly surprised to see by just how much the DAX had outperformed the Footsie. Crikey!, I thought, perhaps I should put a bit of money into a DAX tracker myself.

Then I made a discovery, which, despite being an experienced investor and commentator on the UK market and shares, came as a complete shock. I’ll tell you what that shocking discovery was shortly. But first, here’s why the subject has resurfaced.

I was struck by a distinct feeling of déjà vu when I read an article at the weekend by one of my Foolish colleagues: “Why Euro And US Rivals Are Set To Beat The FTSE 100“. The article noted that, while the FTSE 100 was up a measly 12% over the last 10 years, the US’s S&P 500 had risen by 55% and the DAX had soared by a whopping 125%.

However, I would urge investors to think carefully about ditching their FTSE 100 trackers or S&P 500 trackers in favour of a DAX tracker on the basis of the these figures.

Here’s why.

The shocking discovery I made when advising my in-laws (well, it was shocking to me and I’m sure it will be to many readers too!) is that the DAX is the only major stock market index that includes reinvested dividends. What the DAX’s whopping 125% gain — and massive outperformance of the FTSE 100 and S&P 500 — actually shows is the fantastic compounding power of dividend reinvestment.

The performance of the rarely-seen DAX Kursindex — the capital-only version of the DAX, and thus the true equivalent of the FTSE 100 and S&P 500 — is distinctly less impressive. It has lagged behind the S&P 500, although has still outperformed the Footsie, by a relatively modest degree.

In short, then, the grass is not always as green on the other side of the fence as it can sometimes appear. Switching out of your FTSE 100 or S&P 500 tracker into a DAX tracker may not deliver the stellar returns you might be anticipating.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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