The DAX is up 1.5 percent. The S&P 500 is down 0.3 percent. The MSCI World is flat. You see these numbers every day on the news, in your broker app, in financial headlines. But what do they actually mean — and why does the choice of which index you track with your ETF matter so much?
A stock market index is a calculated number that represents the collective performance of a chosen group of stocks. An index does not physically exist. Nobody owns "the DAX." What exists is the formula that specifies which stocks count, how each stock is weighted, how changes are handled, and how the final number is computed. An ETF that "tracks the DAX" is buying the specific stocks in the specific proportions that the DAX formula describes. Understanding that an index is a rulebook, not a thing, is the key to understanding what you actually own when you own an index ETF.
The DAX (Deutscher Aktienindex) tracks the 40 largest and most liquid German companies listed on the Frankfurt Stock Exchange. Names like SAP, Siemens, Allianz, Deutsche Telekom, Mercedes-Benz, Deutsche Bank, BASF. Until September 2021 the DAX held 30 companies; Deutsche Börse expanded it to 40 to add more sector diversification. Below the DAX sit the MDAX (50 mid-cap companies), the SDAX (70 small-cap companies), and the TecDAX (30 technology-focused names). Together, the DAX family covers the broad German public equity market, but even the DAX 40 only accounts for maybe 80 percent of the total German market cap — many significant privately held German Mittelstand companies are not in any index.
The S&P 500 tracks 500 of the largest US companies by market cap and is the de facto benchmark for the American equity market. Its construction differs from the DAX in several ways: it is managed by a private committee (S&P Global) rather than strict rules, it excludes most non-US-domiciled companies, and it is weighted by free float market capitalisation rather than total market cap. The S&P 500 covers roughly 80 percent of US equity market value.
The MSCI World covers 1,500+ large and mid-cap stocks from 23 developed countries. It is what most German Sparplan investors mean when they talk about "the world" — even though it excludes emerging markets, which is why FTSE All-World and MSCI ACWI exist as alternatives. FTSE All-World and MSCI ACWI add emerging markets (China, India, Brazil, Indonesia, etc.) on top, giving coverage of roughly 85–90 percent of total investable global equity market cap across 40+ countries.
The STOXX Europe 600 covers 600 European companies across 17 countries — broader than the DAX, narrower than the MSCI World, and a good choice if you specifically want European exposure. The Nasdaq-100 covers the 100 largest non-financial companies on the Nasdaq exchange, which is heavily tech-weighted. Each of these is a different slice with different characteristics.
Here is a specific detail most German investors miss — and it matters: the DAX is a performance index (Performanceindex), which means dividends are reinvested into the index calculation. When DAX companies pay dividends, the DAX number treats them as if they were automatically used to buy more shares, so the reported DAX level already includes dividend returns. Most other major indices — S&P 500, MSCI World, FTSE 100, Nikkei — are price indices that exclude dividends. When you see "DAX up 8 percent this year, S&P 500 up 12 percent this year," you are not comparing apples to apples because the DAX number already has dividends added and the S&P 500 number does not. The equivalent comparison would use the S&P 500 Total Return index, which is typically 1-2 percent per year higher than the headline S&P 500 depending on dividend yields.
Most major indices use market-capitalisation weighting, which means bigger companies have a larger influence on the index value. When Apple (about 7 percent of S&P 500) has a big day, it moves the entire index noticeably. When SAP (about 15 percent of DAX) has a big day, the DAX follows. This is why index performance can be driven by just a handful of names — the Magnificent Seven US tech stocks accounted for nearly all of the S&P 500 gain in 2023. Equal-weighted indices exist as an alternative (each stock counts the same regardless of size), but they are less common.
Three practical implications for your portfolio.
First, when comparing ETF performance to an index, make sure the index is the one the ETF actually tracks. An MSCI World ETF underperforming the S&P 500 is not a bug — it is the difference between a globally diversified benchmark (70 percent US, 30 percent rest of world) and a US-only benchmark.
Second, consider what an index does not cover. An MSCI World investor in 2023 had zero exposure to China, India, and most other emerging markets. If you want that exposure, an FTSE All-World or MSCI ACWI — or an MSCI Emerging Markets satellite — fills the gap.
Third, be aware of index concentration. The S&P 500 top 10 holdings are roughly 30 percent of the index. The DAX top 5 are about 35 percent. If your portfolio is 100 percent in one index ETF, you are more concentrated in a handful of large companies than you might think. Combining two indices (MSCI World plus emerging markets, or S&P 500 plus Europe) reduces this effective concentration.
Understanding how indices actually work helps you interpret market news correctly, choose the right benchmark for your own portfolio, and understand what your ETF is really buying every month. The rulebook is public and clear once you know where to look.