DOW vs. DAX: Where's the Value?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Big news! The Dow (DJINDICES: ^DJI) is over 15,000! Bigger news! The Dow is back under 15,000!
All of a sudden, there's a lot of interest in the Dow. Could buying into it through an ETF like the SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA) actually be a good idea? After all, The Moeller Group at Wells Fargo, among others, points out that large-cap stocks like those on the Dow generally perform better than small-cap stocks during the second half of a bull market.
I already have a decent amount of my portfolio in large-cap stocks, but I certainly don't mind buying more...if the price is right. As I was researching whether the Dow is a bit overpriced, though, another report caught my eye. It seems that three days after the Dow hitting 15,000 made Big News, Germany's version of the Dow - the DAX (DAXINDICES: ^DAX) - likewise launched into record territory...and made No News. And that got me thinking... which index is the better place to look for good blue-chip value investments? The Dow...or the DAX?
I thought foreign investments were risky!
Certainly, one of the quintessential rules of thumb for novice investors is to stay away from foreign stocks because of potential risks. Luckily, not all foreign stocks are created equal in terms of risk.
Germany's DAX (or "Deutscher Aktien Index," which translates as "German Stock Index") is, like the Dow, chock full of 30 very large, very low-risk companies. You've heard of one or two of them: BMW and Volkswagen are both on the DAX, along with Bayer of aspirin fame, and Adidas. Certainly, I wouldn't shudder to add any of these stocks to my portfolio from a risk standpoint. But that still leaves the question of value.
So...which index offers the better value?
Assessing the value
Let's start by checking out the P/E ratios of the Dow and the DAX as a whole, and then comparing their highest- and lowest-valued companies by this metric. Since these are all extremely large companies, I'm not going to factor potential growth into the equation.
Sources: Deutsche Boerse for DAX P/E;CNN Money for all other data. All figures as of 6/6/2013
Taken as a whole, the Dow appears very slightly overvalued compared to the DAX. But don't get excited just yet: this is only the average P/E of the 30 stocks on each index. As the chart shows, individual companies' valuations are all over the place, with financials like Deutsche Bank and JPMorgan Chase sporting the lowest P/E ratios and hot stocks Verizon and BMW looking overpriced at the moment. Most of the stocks on both indices, though, including Bayer and Adidas, have P/Es in the teens or 20s.
Now, before you run out and buy Deutsche Bank on the basis of its low P/E alone, consider that big bank stocks nearly always have extremely low P/Es (although opinions differ as to why).
Another factor to consider: perhaps the DAX's P/Es are always lower than the Dow's. Historically, what has the average P/E looked like for these two indices?
The heartbreak of Babel
I figured finding the answer would be easy: just print up a chart showing the historical average P/Es of the two indexes. Not so. Turns out, historical P/E is data that's pretty tricky to come by. I finally managed to find a helpful blog post from 2009 that gave me a chart of the Dow's P/E up until then. I managed to fill in the gap with data from InvestorsFriend.com and The Wall Street Journal. But finding historical P/Es for the DAX was even tougher: not a single site seemed to have this data!
Luckily, before giving up, I remembered that in Germany, the P/E ratio isn't called the P/E ratio. Instead, it's referred to as the "Kurs-Gewinn-Verhaeltnis," which translates to - surprise! - "Price-Earnings-Ratio." When I searched for "KGV of DAX," I hit paydirt on the (German language) website of the Deutsche Boerse (German stock exchange). There I found a chart for the DAX's KGV ratio since 1980. Using all of this data together, I constructed this (rough) chart of the two index's P/Es since then:
There appears to be some correlation between the P/E of the DAX (in blue) and the Dow (in red): gradually moving upwards through the 80s, peaking in the late 90s, and then trending back downward. One big difference: while the Dow is roughly in the middle of its historical average (whether you look from 1980 or from its inception in 1929), the DAX is near a record low, suggesting there may indeed be better value to be found here. Continuing worries about the future of the Eurozone are likely holding down the DAX's valuation, even though its actual price is at an all-time high.
Interestingly, historical prices of the two indices are far more in sync than their average P/Es. Here's a chart showing the Dow and DAX prices over the last 20 years.
As you can see, they practically mirror one another. This isn't surprising either, since in a global economy, most mega-caps will be affected by the same global trends. Likewise, the fact that the DAX's price has shown slightly less recent growth than the Dow isn't necessarily a sign of weakness: historically, the DAX has often had a lower price and shallower growth.
Taken as a whole, the DAX appears to be a slightly better value now than the Dow: Its P/E ratio, though historically often higher than the Dow's, is now very low, likely a result of continuing Eurozone fears. If you're looking to get some additional mega-cap exposure in your portfolio, I'd pass on the Dow ETFs. Instead, try taking a closer look at Deutsche Bank, Adidas, or one of the other DAX companies.
John Bromels has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!