One important stock market index in Europe, the DAX index, monitors the performance of thirty leading German companies listed at Frankfurt exchange. Being the third-largest economy in the world, Germany is an important factor affecting the international economic arena. By investing in the dax index, investors will be able to tap into the bigwigs from Germany. Here are 5 key benefits of investing in the DAX index:
- Diversification
Diversification, just as one of the key privileges of participating in a DAX fund. Investing in one single ETF or index fund with DAX gives access to 30 leading German enterprises representing different industrial spheres as auto industry, chemicals, utilities, etc. The diversity helps diminishing of specific stock risk. Therefore, when one firm underperforms, the effect on your total portfolio is mitigated since gains of other firms can cover up those losses. Investors rely on diversification as an effective risk control technique.
- Exposure to Global Leaders
Germany is represented by its powerful branded firms and those with strong global operations that make up the DAX index. Interestingly they don’t just lead in Germany but all over the world globally. Investing is in DAX will be able to gain exposure from internationally competitive firms who are still in a position to post exemplary performance despite recession in a particular economy. These large multinationals provide stable cash flows and dividends which make them stabilizing elements in a portfolio.
- Economic Growth Potential
It is the third largest economy in the Eurozone and is also the fourth global GDP provider after United States of America, China, and Japan. It is also famous for its robust and export oriented industry sector. Germany being a net exporters country, Dax companies gain significantly from German export oriented ecomony and this trade surplus. Therefore, as one of the economic powerhouses of Europe and the world at large, Germany is anticipated to experience sustained long term growth. Long-term involvement with the country’s economic progress is afforded by investing in DAX.
- Currency Diversification
Moreover, since DAX consists of large German companies, buying its shares automatically offers Indian investors a way to diversify their currency exposure. The majority of the portfolios hold a high INR exposure, with the exception of DAX, which carries Euro exposure. It also reduces currency risks as it acts as a natural hedge against unfavorable movements in foreign currencies. Euro’s value depends on many other economic drivers than just INR. Investing portions of your capital in Euro will have the advantage of giving you better risk adjusted returns for the long-run compared to other investments.
- Strong Fundamentals
Over the years, they have been reporting consistent good performance for a number of DAX companies. These companies enjoy high profits, constant earnings’ growth, strong balance sheets, and generous dividends. DAX has an average dividend yield of about 3%, which is above most other international indices. DAX ETFs/funds offer investors an avenue of investing in companies built on sound business models and fundamentals. DAX investing is therefore ideal for both income as well as long term capital appreciation.
Conclusion
To enable 5paisa investors to share a part of Germany’s economic growth, the DAX index allows them easy participation through exposure to international corporations that compete on the global market. However, when added to diversified global portfolio, it can give returns without increasing any risk. It gives such returns because it has diversification, currency plays and good company fundamentals. Long-term investors as well as those seeking dividend income may invest in DAX index.
