Germany’s DAX-30 Goes Haywire; ETF Unaffected

Bizarre action in the stock of Volkswagen resulted in wild swings in Germany’s benchmark DAX-30 index this week leading the Deutsche Borse to step in and impose weighting caps.

The Financial Times article Regulator probes VW share trades reports that rival Porsche revealed over the weekend that it held a much bigger ownership interest in VW than hedge fund managers realized. Starting on Monday, traders scrambled to cover short positions causing VW’s market value to nearly quadruple, leaving it as the 2nd largest company in world by the end of trading on Tuesday.

On Wednesday, Porsche promised to relinquish a small portion of its VW shares, causing VW’s stock to decline 45% in one day.

Porsche and VW are both components of the market-cap weighted DAX-30. The wild swings in the stock prices of the 2 companies resulted in an 11% price jump for the index on Tuesday even though shares of 21 of its 30 constituents fell and Europe’s other big markets rose less than 2 percent that day.
The largest German equity ETF available to US investors is the MSCI Germany Index Fund (EWG) which had only 8% of assets concentrated in Volkswagen AG common and preferred stock and about 1% in Porsche preferred stock at the end of September. The German equity ETF was buffered from the swings in VW and Porsche shares since the tracking index for EWG is rebalanced quarterly.

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