DAX Vs S&P 500 Performance Analysis

The German equity index DAX 40 has made headlines this week with a notable gain of over 5% in just one week, despite ongoing economic challenges in the region. In this article, we will analyze its historical performance, standardized in US dollars for consistency, and compare it to the S&P 500.

Historical Returns:

The chart above illustrates rolling annualized average returns, which reflect the performance of holding each investment for one year across various time periods. Historically, the DAX 40 has delivered higher returns compared to the S&P 500, both on average and in median yearly performance. Specifically, the DAX 40’s average annual return stands at 9.4% versus 9.1% for the S&P 500, while its median return is 12.11%, compared to the S&P 500’s 10.98%.

However, the higher returns offered by the DAX 40 come with significantly greater volatility compared to the S&P 500, at 21.77% versus 15.5%. This indicates that the DAX 40 exhibits a much higher degree of return uncertainty, making it a riskier option relative to the S&P 500.

The chart above highlights that the probability of achieving a positive return is generally higher for an investment in the S&P 500 across most timeframes.

From a seasonality perspective, the DAX 40 typically experiences two months of negative average returns during the year, a trend not observed in the S&P 500.

The chart above highlights the five largest drawdowns of the DAX 40 index. The most significant occurred between January 9, 2008, and October 22, 2013, lasting 2,113 days and resulting in a -62.16% decline. In comparison, the S&P 500 experienced a smaller maximum drawdown of -56%, with a faster recovery time of 1,997 days.

Risk-Adjusted Returns:

The chart above displays the rolling one-year annualized alpha of the DAX 40 relative to the S&P 500. On average, the DAX generates a -0.74% alpha over a one-year period. This indicates that, after adjusting for risk (beta), the S&P 500 delivers 0.74% higher returns compared to the DAX.

In terms of Sharpe ratio, both investments exhibit similar patterns over time. However, the S&P 500 has a higher average annual Sharpe ratio of 0.44, compared to 0.33 for the DAX 40. This suggests that, on average, the S&P 500 provides higher returns for every unit of volatility than the DAX.

Why not own both?

Efficient frontier analysis indicates that a portfolio allocation of 25% DAX 40 and 75% S&P 500 has historically delivered superior risk-adjusted returns compared to holding either index individually.

Conclusion:

In conclusion, while the DAX 40 has historically outperformed the S&P 500 in terms of average and median annual returns, this comes at the cost of significantly higher volatility and longer recovery periods during drawdowns. The S&P 500, on the other hand, offers more consistent positive returns, a higher Sharpe ratio, and better risk-adjusted performance over time. 

Full Report:

Full statistical report available for download in the additional information down below.