ETF | Haobin Tan

ETF 101

Sat, 01 Mar 2025 00:00:00 +0000

What is ETF?

An ETF (Exchange Traded Fund) is an exchange-traded index fund, which combine three important concepts (fund, index investment and exchange-traded) in one product.

Fund

A strictly regulated financial product that pools money from investors and invests it in the capital markets according to a predefined investment objective
Through a single investment, it is very easy to participate in the performance of a basket of securities. Because the invested money is divided among several securities, the risk of the investment is also spread (diversification).
Since price increases and decreases of individual securities can balance each other out, the value of a fund usually fluctuates less than the value of an individual security.

Index fund

A fund, whose objective is to replicate a rule based index as closely as possible (for example, share indices such as the S&P 500, DAX or MSCI World).
An index represents a basket of several securities. If the prices of the securities in an index rise, the value of the index fund also rises. If they fall, the value of the index fund falls accordingly.
Unlike actively managed funds, with ETFs it is not individuals who make the investment decisions. Instead, the composition of the index determines which securities the ETF invests in and with which weighting. Since no fund management has to be paid for the analysis of the individual securities, the ongoing costs of index funds are usually significantly lower than those of active funds.

An index tracks and measures the performance of a group of assets representing a specific segment of the market.

More see: What is an index?.

Exchange trading

ETFs are index funds that can be bought or sold on stock exchanges.
A stock exchange listing also has the advantage that prices are continuously quoted during trading hours so investors can transparently follow price movements. This contrasts with actively managed funds that are not listed on stock exchanges, which can usually only be traded once a day directly with the investment company.
There are no entry fees for exchange trading.

An ETF is a basket of investments like stocks or bonds that trades on the stock market.

How can ETFs be used for investing?

ETFs are the ideal product to invest savings into the capital markets over the medium to long term.

ETFs provide very uncomplicated access to a broadly diversified portfolio.
ETFs greatly simplify essential questions concerning the selection of individual securities and their weighting within a portfolio.

From the individual ETF to the ETF portfolio

ETFs can be used to invest into numerous

asset classes: shares, bonds and commodities
market segments: such as countries, sectors, or themes

By combining several ETFs, a personalised portfolio can be created at a very low cost. ETFs on very broad indices in particular are suitable as the basis or core for a long-term portfolio

The size of the individual positions in an ETF depends on the weighting method of the index being tracked. Most indices are weighted by market capitalisation.

The more market capitalisation a company has, the higher its weighting in the index and, therefore, also in the ETF.

-> This can lead to a situation where a few individual stocks in the ETF are responsible for the majority of the performance.

Popular equity ETFs on the market that do not weight companies by market capitalisation and/or that enable investments with a special focus:

Sustainable ETFs

Consider sustainability aspects in their composition. Sustainability is usually measured in the three dimensions of environmental, social and governance (ESG)
Investors should look closely at how well the ESG criteria applied correspond to their own ideas of sustainability.
Sustainable ETFs are often identified by name suffixes such as “ESG” or “SRI” (socially responsible investing).

Regional and country ETFs

Invest regionally, depending on where the included companies are headquartered or have their home stock exchange.
However, since large companies typically sell their products globally, one is usually also exposed to the opportunities and risks of other markets.
Example: An ETF on the DAX
- A DAX ETF tracks the performance of the 40 stocks from the German Share Index.
- The individual shares have the same weighting in the ETF as in the index. Due to the strong focus on German export-oriented companies, the index and thus ETFs on it tend to be less diversified than ETFs based on indices with significantly more shares from several countries and a broader mix of sectors.

Sector and thematic ETFs

Usually invest with a higher concentration in sectors, such as information technology, industry or health
Thematic ETFs invest in companies that operate around a theme such as renewable energy or ageing society (i.e. away from the classic sector classification).
Example: An ETF on the Nasdaq 100

Factor ETFs

Constructed according to the findings of various investment studies
- These studies state that with focus on certain factors, an excess return can be achieved versus the broad market
However, this need not be the case in all market cycles.
Well-proven factors include small caps (shares of companies with low market capitalisation), value (low-valued shares), and minimum volatility (shares with comparatively low price fluctuations).

Specialized ETFs

Depending on the structure of the ETF portfolio, ETFs with a special focus can be a useful component

Special attention should be paid to the mix of asset classes when creating a portfolio.
- Depending on the individual risk-bearing capacity and investment horizon, different allocations are suitable, such as with equity and bond ETFs (for example 70 percent equities, 30 percent bonds). Compared to equities, bonds are generally less susceptible to fluctuations and ensure greater stability of the portfolio (with lower expected returns over a long investment period).
- ETFs on other asset classes such as commodities can be added.
Advanced investors sometimes use a core-satellite strategy to customise their investment.
- Core: A broadly diversified basic investment, which makes up the majority of the portfolio
- Satellites: ETFs with a special investment focus are added (around the core) with a lower weighting

With intelligent additions, investors can diversify their ETF portfolio more broadly or give it an individual touch. In doing so, they should be careful not to unintentionally create cluster risks.

For example, an ETF on the MSCI World already contains the companies from a Nasdaq 100 ETF. Putting both products in the portfolio does not diversify, but creates a stronger focus on US technology stocks.

From a risk perspective, the more specialised an ETF is - for example, a country ETF on a very small equity market or an ETF on a niche theme - the more it should be considered as a small addition to the portfolio in addition to ETFs on the broad equity market.

Beginners in particular should focus (initially) on market-wide ETFs in order to avoid unintended concentration risks of individual sectors or regions in the portfolio!

ETF selection: What criteria to look for

Tracking method

An ETF tries to replicate its index as best as possible. In terms of replication methods, a distinction is made between physical and synthetic replication.

Full physical replication
- Investments are made directly in all the securities contained in the index. This is sometimes difficult to do for large international indices with many thousands of securities.
- For reasons of efficiency, fund companies therefore often use “optimised sampling”: The ETF invests only in those securities that best represent the performance of the index. Securities that are too small or illiquid are avoided. This saves the fund unnecessary costs and risks.
Synthetically replication
- Do not invest directly in the securities contained in the index, but enter into an exchange transaction (“swap”) with a large investment bank.
  - The ETF receives the performance of the underlying index
  - In return, the investment bank deposits collateral should it become insolvent.
- Depending on the asset class and market segment, synthetic ETFs can have advantages. For example, synthetic ETFs on US equities have tax advantages that can lead to better performance.
- Due to strict regulation and full collateralisation, synthetic ETFs are considered as safe as physical ETFs.
hybrid replication
- A combination of physical and synthetical replications
- ETFs with physical and synthetic replication are selected in order to combine the advantages of both in the best possible way. (This is the case for the Scalable MSCI AC World Xtrackers (Acc).)

Comparison

Replication Method	Definition	Advantages	Disadvantages
Physical	Directly holds the constituent securities of the index	Transparent, simple	Can have higher costs, limited by market liquidity
Synthetic	Uses derivatives (such as swaps) to replicate the index’s performance	Low cost, suitable for hard-to-access markets	Credit risk, lower transparency
Hybrid	Combines physical holdings and derivatives to replicate the index	Flexible, covers a broader range of assets	More complex, possibly higher fees

Use of income

Distributing ETFs (Dist)
- Dividends are paid out to your cash account at regular intervals (annually, semi-annually, quarterly or even monthly)
- Often marked with a “Dist” or “D”
Accumulating ETFs (Acc)
- Reinvest current income in securities automatically. -> This allows investors to benefit from the compound interest effect and they do not have to reinvest dividends manually.
- Usually marked with an “Acc” or “C” in the name

Costs

Total Expense Ratio (TER): The ongoing annual cost, which is taken as a percentage of the investment volume.

These account for
- management fees of the fund company
- Licensing costs for the use of the index
- Custodian bank fees for the safekeeping of the securities contained in the ETF
Not included are transaction costs for reallocations within the fund or costs for hedging foreign currency risks, if this is done.
Deducted directly from the fund assets and is already included in the market prices.

Tracking difference: The performance of an ETF may deviate (slightly) from the performance of its index due to the ongoing costs, taxes at the fund level, and the imperfect replication of the index. It is measured over a certain time interval and is shown on the issuer’s website or in the ETF’s factsheet.

Fund volume

Provides information about the size of the fund.
- From a fund volume of approx. 100 million euros, it can be assumed that the ETF can be operated economically by the issuer in the long term.
- For ETFs with a higher TER (such as thematic ETFs), this threshold can also be lower.
Should an ETF be closed due to lower popularity, this is usually not a problem, as investors are able to sell their units via the stock exchange before closure.

Fund domicile

Refers to the country in which the fund is launched.
Many ETFs are domiciled in Luxembourg (because of its favourable financial legislation) or Ireland (because of partial tax advantages for issuers).
As funds are strictly regulated financial products, domicile is usually irrelevant.
- However, there may be differences in certain situations. For example, physical ETFs domiciled in Ireland on US equities pay lower withholding taxes (15 per cent) than ETFs domiciled in Luxembourg (30 per cent), which can lead to better performance.

A tool for look for ETFs: ETF Database

Advantages of ETFs

ETFs are diverse and have low costs.

ETFs reliably track the market.

Allow investors to invest in an entire market segment with a single investment.
The selection of individual securities as in active fund management is dispensed with. -> The market return can be generated very reliably. The investment does not depend on whether a fund manager outperforms the market (also called “alpha”). (Studies show that the vast majority of active fund managers fail to beat their respective passive benchmark over time.)

ETFs are transparent.

It is possible to invest in numerous securities at the same time.
The composition can be viewed on the issuers’ website on a daily basis. Due to the rule-based structure of the index, there are no surprises.

ETFs are regularly rebalanced.

The issuer takes care of the regular rebalancing of the securities within the ETF. -> An active adjustment of one’s own investment is not necessary.
Regular rebalancing ensures that the components of a (physical) ETF always correspond to the underlying index and thus to the relevant market.

ETFs are safe.

Capital invested in funds and ETFs is described as special assets. The assets are kept separate from the fund’s administrator, the fund company, and are protected from insolvency.
An auditor inspects the fund’s books at least once a year.

How to Analyze ETFs?

After you find the ETF that you’re interested in, you need to first look at its profile (simply Google the name of the ETF).

Summary
Expense ratio
Performance
Portfolio (Market sector)
Distribution

Diversification

Fund Overlap

Fund overlap

Reduce the benefits of diversification for investors and may create unseen risks 🙁
Example: 99.4% of the stocks in VOO are also in VTI.

Tool to compare and analyze ETFs: ETF Research Center

Fund Overlap Tool: Pay attention to the “Overlap by Weight”

Portfolio correlation

Correlation: A measure that shows how prices of two securities move in relation to each other (i.e., if one goes up or down, does the other also go up or down)

Measured by Correlation Coefficient $\in [-1, 1]$, a statistic that indicates the degree to which two securities move in relation to each other

Correlation	Correlation coefficient
Positive
Negative

To maximize the diversification, we should include assets that are less correlated

Stocks
Bonds
Real Estate
Commodities
Cash equivalents

You should NOT invest in assets that have a negative correlation with one another. Because one goes up, while the other goes down, those two movements may cancel out any money you make (assuming they are weighted equally).

For more about portfolio correlation, read: 3 Correlation Myths In Portfolio Construction.

Reference

Theory

Fri, 07 Mar 2025 00:00:00 +0000

Passive Investment through ETFs

Fri, 07 Mar 2025 00:00:00 +0000

💡Take away

Instead of picking individual stocks, passive investing aims to reflect the entire market in your portfolio.
ETFs offer a cost-effective way to invest in multiple stocks at once.
Passive investing generally has a higher success rate than active investing.
The process is fully automated, saving you time and money.
Passive investments, like ETFs, are rational and follow clear rules, unlike actively managed funds, which are influenced by emotions.

In passive investing, you focus on the market as a whole instead of individual stocks, allowing you to benefit from overall market returns. This strategy is often more profitable in the long term than active strategies, and it also saves you time.

Active vs. Passive Investing

In active investing, investors

monitor the market and decides which stocks are undervalued or overvalued
Invest in these stocks with the expectation that the stock price will eventually adjust to their predicted value, allowing them to profit when they sell the stock. The active selection of stocks is called stock picking.
Can also invest in actively managed funds, where a fund manager decides which companies to invest the investors’ money in.
aim to outperform the market return

On the other hand, passive investors believe that it is not possible to beat the market. Instead, they invest in an average global portfolio and, in return, achieve the average market return.

Market Return: the profit generated by an investment over a specific period.

For example, if you buy a stock for €100 and sell it for €105 after one year, your return is €5. Market return refers to the profit generated by the entire market. It can be measured using an index.

Comparison:

	Active Investing	Passive Investing with a Global Portfolio
Goal	“Beat” the market return	Achieve the market return
Source of Return	Risk and skillful strategy (cleverness)	Systematic market participation
View of the Market	Market as an opponent	Market as an ally
What does the investor bet on?	Individual companies, sectors, or time periods. Portfolio composition is frequently changed.	The global economy. No short-term shifts.
Degree of Diversification	Low in the classic active approach	Global, systematic diversification across asset classes
Investment Horizon	Individual; often not predetermined	Long-term
Complexity	Tendentially high: Requires understanding of the stock market and individual companies.	Low
Costs	Tendentially high: Frequent trading incurs order fees, trading platform fees, and other charges.	Low: ETFs with low TER (Total Expense Ratio) have minimal impact on returns.
Time Commitment for the Investor	Relatively high	Low

Who Achieves Higher Returns?

A study by S&P Dow Jones, an index provider, analyzed the performance of actively managed funds over a 10-year period. The results showed that 98% of global equity fund managers underperformed their benchmark index. Among actively managed funds investing in the German market, 80% also underperformed their respective index.

Over multiple years, the likelihood of an actively managed fund outperforming the market return decreases further. Even if a fund manager achieves higher returns in one year, it does not guarantee similar performance in the following year.

Funds

A fund is a pool of capital. In the case of an investment fund, the contributed money is invested in various assets. Funds can be actively managed by a fund manager or passively regulated by tracking an index.

Why Passive Investing?

The foundation of passive investing is the Efficient Market Hypothesis, developed by economist Eugene Fama:

In an efficient capital market, all available information is already reflected in the price of a security—and our market is considered such an efficient market.

This means that all key figures, circumstances, background information, and forecasts are automatically incorporated into the price of a stock. Taking this further, we can trust that an exact replication of the market would be equally efficient. Combining this idea with the assumption that capital markets will grow over the long term, the logical conclusion is to invest in an exact copy of the market.

In short, you take existing markets and trust that the global economy, specific regions, or industries will develop positively.

Buy-and-Hold Instead of Speculation

Buy-and-Hold means buying shares and holding onto them. This strategy can be applied to various products, including individual stocks.

As a passive investor, you

have a long-term investment horizon, meaning you hold your investments for as many years as possible
ride out short-term price fluctuations, avoid chasing trends, and don’t get tempted by so-called “hot tips”
only check your portfolio occasionally, as the goal is not to access the money immediately but to let it work for you over the long term
avoid speculation, meaning you don’t rely on personal knowledge or gut feelings to beat the market.

Advantages of long-term passive buy-and-hold strategy

Good long-term return
Maximal diversification
Cost-effective (ETFs typically have lower fees than actively managed funds.)
Time-saving
Start with small amount of capital
No timing necessary

Tax Advantages of Buy-and-Hold in Passive Investments

Passive investing offers a tax benefit known as tax deferral, which creates a present value advantage: A significant portion of your tax payment is deferred. 👏

Over time, the effective tax rate decreases. By paying taxes later, you can let your money work for you longer.
You only pay capital gains tax when you realize your profits. If your investments remain invested and you don’t withdraw them, no taxes are due. During this time, (according German tax law) the 25% capital gains tax plus solidarity surcharge and, if applicable, church tax continue to work in your favor.

Accumulating ETFs automatically reinvest your returns. While a preliminary tax (Vorabpauschale) is levied, it is usually very low. For all ETFs, you must pay taxes on gains when you sell shares at a profit. With a Buy-and-Hold strategy, this often happens only years or even decades after the initial investment.

In Germany, every saver is entitled to a tax-free allowance (Sparerpauschbetrag) of €1,000 (€2,000 for married couples). Capital gains, such as dividends or realized capital gains, remain tax-free up to this annual limit.

How Can You Invest in the Entire Market?

To avoid the need to analyze the entire global economy and purchase countless individual stocks, there are financial products that replicate the entire world economy. These products achieve this through indices, which form the basis of an ETF’s portfolio.

3 Tips for Successful Passive Investing

Understand the Risks and Assess Yourself Accurately.

Even though the risks of passive investing are lower than active trading, you should still familiarize yourself with market risk and determine your personal risk tolerance.
Choose ETFs That Align with Your Strategy.

You can invest in different markets, regions, and currencies—depending on what matters most to you. Additionally, you can focus on specific areas, such as factor investing or ESG (Environmental, Social, Governance) criteria. You remain flexible because you can trade during regular market hours if you want to rebalance your portfolio.
Separate Passive and Active Investments

If you want to invest part of your wealth passively and use the rest for active investments or speculation, that’s perfectly fine. For psychological reasons, we recommend opening a separate brokerage account for this purpose. This way, you won’t be tempted to deviate from your Buy-and-Hold strategy with your passive investments.

FAQs

What does passive investing mean?

With passive investing, you bet on the growth of the markets. This strategy combines Buy-and-Hold and Indexing. You can replicate various markets using ETFs.

Who is Passive Investing Suitable For?

Passive investing is suitable for every investor. One of its advantages over active investing is the saving of time and costs. With passive investments, you don’t need to constantly analyze company metrics, market statistics, or similar data.

When Do I Pay Taxes on Passive Investments?

Capital gains tax is due on profits from selling securities. However, with a long-term investment strategy—such as using accumulating ETFs—you can achieve a tax deferral effect and save money. By paying taxes later, your money can continue to generate returns for you.

Reference

Passives Investieren durch ETFs

What Is Index

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

An index is a numerical indicator that tracks the price performance of a specific group of stocks.
Indices can represent industries, sectors, or regions. Some indices include only a handful of securities, while others cover over 1,000.
ETFs and index funds replicate these indices, allowing you to benefit from their performance at a low cost.
The most well-known German index is the DAX (Deutscher Aktienindex), which tracks the top 40 German companies.

What is an Index?

An index is calculated to illustrate price developments.

Example

The Consumer Price Index (CPI) is determined by the Federal Statistical Office of Germany, which examines the prices of 650 goods each month. These goods represent what German households typically consume, including categories like food, housing, and transportation. Every month, the prices of the same basket of goods are checked. By analyzing the price changes of this basket, inflation can be measured.

Similarly, a stock index tracks the price movements of numerous stocks. It provides a snapshot of how a specific group of stocks is performing, making it easier to understand market trends.

The German Stock Index (DAX)

The DAX (Deutscher Aktienindex), the German stock index, tracks the performance of the 40 largest German companies. It serves as a barometer for the stock market.

To be included in the DAX, a company must meet specific criteria. For example, DAX companies must:

Be headquartered in Germany,
Be listed on the stock exchange,
Be among the 40 largest German companies by free-float market capitalization.

During trading hours, Xetra calculates the DAX every second, providing real-time updates on its performance.

Xetra

The Deutsche Börse AG is a company that provides stock exchange infrastructure, ensuring that trading functions smoothly. One of its most significant trading platforms is Xetra, which stands for “Exchange Electronic Trading”. Xetra enables electronic stock exchange trading, allowing you to buy and sell stocks and ETFs.

Similar to a stock price, you can also track an index using a chart. However, the value of an index does not represent a single company but summarizes the performance of an entire market. For example, the DAX shows how the top 40 German companies have performed over the past minutes, weeks, or years.

Fluctuations in Stock Indices

Indices generally fluctuate less than individual stocks because they represent multiple companies, resulting in lower volatility. However, indices can still experience significant fluctuations, especially during political or economic crises. For example, at the onset of the COVID-19 pandemic, the DAX dropped below 9,000 points in a short period, reaching its lowest level since February 2016.

Volatility The term volatility generally refers to fluctuations. High volatility means that a stock price or market value experiences significant swings.

Index Types

There are various indices that reflect different developments. Depending on the information you need, you may refer to different indices. In the investment sector, the most important indices are those that track price or performance. Every country has a benchmark index that represents its top companies.

Price Index

A price index reflects the pure price development of stocks.
- In the case of a dividend payout, the dividend amount is subtracted from the stock’s value, causing the index to drop at the time of the payout.
The most well-known example of a price index is the Dow Jones Industrial Average (DJIA), which tracks the 30 largest publicly traded companies in the United States.

Dividend A company can share its profits with shareholders by distributing dividends. Shareholders benefit from this cash flow, which is freely available money. To pay dividends, a company does not necessarily need to make a profit; it can also draw this amount from other sources. Dividend payments are entirely voluntary, and a company may choose to reinvest its profits instead.

Performance Index

A performance index, also known as a total return index, measures the growth in value of capital investments.
Unlike a price index, the index publisher includes capital changes and dividend payouts in the calculation. Dividends are reinvested, meaning they are added back into the index. As a result, the performance index does not lose value after a dividend payout.
One of the most well-known performance indices is the DAX-40. The DAX Performance Index receives significantly more international attention than the DAX Price Index because it provides a comprehensive overview of the index’s total value development by including dividends.

Benchmark Index

A benchmark index lists the most important companies of a nation.
For example, the DAX is the German benchmark index, and the Nikkei 225 is the Japanese benchmark index.
Using a benchmark index, you can gain a good overview of a country’s stock market. Geopolitical decisions often have significant impacts on companies, and these effects can frequently be observed in the index.

How are Indices Weighted?

The criteria for inclusion in an index depend on the organization that publishes it.

The DAX is calculated by Deutsche Börse AG, which uses free float and market capitalization to determine which 40 companies are included.
- Free float refers to the number of shares available for trading by investors, while market capitalization indicates the total value of a company’s outstanding shares.
- Once a year—in September—Deutsche Börse AG reviews and decides on changes to the DAX. Companies may be removed from the DAX 40, or new companies may be added.
The Dow Jones, the most important U.S. index, uses a different weighting method: it is price-weighted. The higher a stock’s price, the greater its weight in the index.

Stock Exchange A stock exchange is a marketplace where stocks and other securities are traded, bringing buyers and sellers together. Stock exchanges have fixed trading hours and rules. In Germany, there are eight securities exchanges, with the Frankfurt Stock Exchange being the most important.

Important Stock Indices

Overview of Important Stock Indices

Index	Region	Description
MSCI World	Global	The MSCI World Index (Morgan Stanley Capital International World Index) A highly important stock market benchmark that provides insights into the global equity market Tracks over 1,600 stocks from 23 developed countries. Excludes emerging markets (such as developing countries) and small-cap stocks (shares of smaller companies). U.S. companies make up approximately 50% of the index, making it heavily influenced by the performance of the U.S. stock market.
MSCI Emerging Markets	Emerging Markets	Tracks the performance of approximately 1,200 companies from 24 emerging markets. These companies are primarily large-cap and mid-cap, meaning they have high and medium market capitalizations The index is weighted by free-float market capitalization. Currently, the index represents about 13% of the global market capitalization.
MSCI ACWI	Global	The MSCI All Countries World Index (ACWI) combines the MSCI World and MSCI Emerging Markets, covering 2,750 stocks from 23 developed and 24 emerging markets. Emerging market stocks account for approximately 10% of the index U.S. companies account for 63%.
DAX	Germany	The DAX tracks the 40 largest companies listed on the Frankfurt Stock Exchange. However, not all companies contribute equally to the index’s value. It represents about 75% of the market capitalization in Frankfurt and is a key indicator of the German economy. The DAX tends to be more volatile compared to British and U.S. indices.
S&P 500	USA	The S&P 500 includes the 500 largest companies listed on the NYSE or NASDAQ. It represents about 80% of the U.S. stock market. It provides a comprehensive overview of the U.S. stock market’s performance and is considered by many to be the best indicator of the U.S. equity market.
FTSE 100	UK	The FTSE 100 tracks the 100 largest companies by market capitalization listed on the London Stock Exchange. It represents about 81% of the UK market and is a key indicator of British corporate wealth, which holds a similar importance for the British market as the S&P 500 does for the U.S. market. The FTSE 100 represents approximately 81% of the total market value of the London Stock Exchange.
NASDAQ 100	USA	The NASDAQ 100 is a technology-heavy index on the NASDAQ exchange, comprising 100 stocks of technology companies. The companies in the NASDAQ 100 are weighted based on their market capitalization. Due to its heavy concentration in fast-growing, often high-risk technology companies, the NASDAQ 100 tends to be the most volatile among the three major U.S. indices (Dow Jones, S&P 500, and NASDAQ 100).
Dow Jones	USA	The Dow Jones Industrial Average tracks 30 of the largest U.S. companies and is price-weighted, meaning the value of the index is based on the stock prices of its components rather than their market capitalization. It is one of the oldest and most widely followed indices in the world.
Euro Stoxx 50	Europe	The Euro Stoxx 50 includes the 50 largest publicly traded companies in the Eurozone. It is considered a leading benchmark for the European stock market, with France and Germany being the most represented countries. It is often referred to as the European benchmark index.
HSCEI	China	The Hang Seng China Enterprises Index tracks 50 mainland Chinese companies listed on the Hong Kong Stock Exchange. These mainland Chinese stocks traded in Hong Kong are also known as H-shares. The index is weighted based on the free-float market capitalization of the companies, with no single stock allowed to exceed 10% of the index’s weight.
SMI	Switzerland	The Swiss Market Index (SMI) tracks the 20 largest companies on the Swiss Exchange. It represents about 90% of the market capitalization and trading volume in Switzerland.
Nikkei 225	Japan	The Nikkei 225 is Japan’s leading index, tracking 225 companies listed on the Tokyo Stock Exchange. It is one of the most important indices in Asia.

From Index to ETF

You can not invest directly in a stock index. However, some fund providers replicate indices exactly, allowing you to benefit from the performance of a stock index. Exchange-Traded Funds (ETFs) automatically track the performance of indices. There are ETFs for almost all stock indices, including the DAX, MSCI World, and S&P 500. You can easily buy shares of ETFs through an online broker.

ETFs are significantly cheaper compared to actively managed funds. Actively managed funds require entire teams of analysts and fund managers, whose salaries drive up costs. ETFs, on the other hand, operate fully automatically, following the index. As an investment model, ETFs are becoming increasingly popular among private investors because they offer lower risk and costs compared to investing in individual stocks.

What Are ETFs

Fri, 07 Mar 2025 00:00:00 +0000

💡 Take Away

An ETF is a fund that tracks an index, such as the DAX or MSCI World.
With ETFs, you can invest in thousands of companies with small amounts of money, allowing you to diversify your portfolio.
ETFs are significantly cheaper than actively managed investment funds. Their annual expense ratios typically range between 0.05% and 0.7% of the investment amount.
ETFs are ideal for long-term investing in stock markets.
ETFs can replicate an index using physical replication, synthetic replication, or a combination of both methods.

What is an ETF?

ETFs, short for Exchange-Traded Funds, are index funds that are traded on stock exchanges.

“Exchange-traded” means that a stock exchange acts as a marketplace between you, the buyer, and the fund provider. Other index funds can be purchased directly from the provider.
“Index fund” means that the fund exactly replicates a stock index.
In simple terms, a fund is a type of pooled investment vehicle where capital (money) is collected and then invested.
Since an ETF closely replicates an index, its price moves in parallel with the index.
- If the index rises, the ETF generates returns.
- The value of an ETF falls when the index declines.

Who Issues ETFs?

ETFs are offered by fund companies. The issuer of an ETF is called an emittent. Some of the most well-known ETF issuers include Amundi, Xtrackers, iShares, and Lyxor.

The ETF fund company selects an index
Then it collects money from investors.
Using this money, the company purchases the securities included in the index.
The fund company then issues a security (the ETF) that reflects the performance of the fund.
An ETF security is essentially a certificate representing your share in the ETF. When you buy such a share, your money flows into the fund and is invested in the stocks included in the index. The stock purchases by the fund provider are fully automated.

How an ETF Replicates an Index

A fund company examines which companies are included in the DAX and their respective weightings.
The fund company purchases these stocks.
When new companies are added to the index, the fund company expands the fund to include these stocks.Similarly, it sells stocks that are removed from the index.
If the fund’s volume increases, the ETF provider can buy more shares.

All of this happens—unlike with actively managed funds—fully automatically and without the analysis of fund managers.

Market Capitalization

The market capitalization of a company is calculated by multiplying the total number of outstanding shares by the current market price of one share. If a company has many high-priced shares in circulation, it has a high market capitalization and is considered valuable.

Free Float

Free float refers to all shares that are not held by major shareholders or in large blocks. These shares are accessible to the general public. If a shareholder owns more than 5% of a company’s shares, those shares are no longer considered part of the free float. The higher the proportion of free float shares, the more liquid and tradable the stock becomes.

Replication Methods

The way an ETF replicates its index is called the replication method. The goal is to track the index as accurately as possible while keeping costs low. The replication method affects the costs, performance, and security of an ETF. There are three main methods:

Physical Replication
Sampling
Synthetic Replication

Physical Replication

In physical replication, the ETF purchases the stocks included in the index. If the portfolio exactly matches the index, it is called full replication or direct replication. This method is particularly useful when an index consists of a manageable number of stocks. For example, a DAX ETF can be easily replicated fully through physical replication.

Sampling

If an index consists of many positions, fully replicating it physically would require a large number of transactions. To remain cost-efficient, the ETF provider purchases only a subset of the stocks, specifically those that most influence the index’s performance. This method is called sampling or optimized physical replication. It is a hybrid approach between physical and synthetic replication. Sampling is particularly suitable for an MSCI World ETF, which includes over 1,500 positions.

Synthetic Replication

In synthetic replication, the ETF provider replicates the index through a swap agreement with a financial institution (swap counterparty). The financial institution holds the positions of the ETF, while the ETF provider holds a different portfolio. The ETF provider receives the returns of the ETF positions, and the financial institution receives the returns of the collateral portfolio. Swap-based ETFs are commonly used for niche markets and commodities.

Method	How It Works	Advantages	Disadvantages	Best For
Physical	Buys the actual securities in the index.	Transparent, no counterparty risk.	Higher costs for complex indices.	Indices with few components (e.g., DAX).
Synthetic	Uses derivatives (e.g., swaps) to replicate index performance.	Cost-effective, precise replication.	Counterparty risk, less transparent.	Niche markets, commodities.
Hybrid	Combines physical and synthetic methods.	Balances cost and risk.	Slightly more complex.	Indices with mixed accessibility.

Differences Between ETFs and Index Funds

ETFs are a type of index fund—with the unique feature of being exchange-traded. This means:

ETFs can be bought and sold continuously during trading hours on the stock exchange.
Traditional index funds are not traded on an exchange; instead, they are purchased directly from the fund provider.

Both passive index funds and ETFs share the same goal: to replicate an index as accurately and cost-effectively as possible. Both have low fees because they do not require a fund manager or an analysis team to track market developments.

Which is better?

ETFs offer greater flexibility, as they can be traded at any time during market hours. However, John Bogle, the inventor of the index fund, warned that this flexibility can be tempting for private investors.
ETFs are typically used for a Buy-and-Hold strategy, meaning you don’t need to trade frequently.
There are more ETFs than index funds, giving you access to a wider range of markets, strategies, and asset classes.

Differences Between ETFs and Active Funds

Aspect	ETFs	Active Funds
Management	Passive: Automatically replicates an index.	Active: Fund managers make investment decisions.
Performance	Tracks the market; often outperforms active funds long-term.	Managers aim to beat the market but often underperform.
Costs	Low fees: TER (Total Expense Ratio) typically 0.05%–0.7%.	High fees: Average 1.9% in Europe (Morningstar).
Flexibility	Limited to index composition; no active stock picking.	Managers can buy/sell assets based on market analysis.
Risk of Mistakes	No human error; follows the index.	Managers can make wrong decisions.
Transparency	Holdings are transparent and match the index.	Holdings may change frequently, less transparent.
Best For	Long-term investors seeking low-cost, market-matching returns.	Investors willing to pay higher fees for potential outperformance.

Reference

Was sind ETFs? Exchange Traded Funds erklärt!

ETF Advantages

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💡 Take Away

Advantages of ETFs

Diversification: Invest in over 1,000 companies with a single global ETF.
Low Costs: ETFs have a cost-efficient structure with low expense ratios (TER).
Transparency: ETF holdings are always visible; no reliance on a fund manager’s strategy.
Automation: ETFs are automatically managed, following clear, rule-based strategies.
Liquidity: ETFs can be traded anytime during market hours.
Safety: Assets in ETFs are held as special assets (Sondervermögen) in Germany, protecting them from fund company bankruptcy.
Savings Plan Compatibility: Easily set up a monthly savings plan (Sparplan) through your broker.

Diversification: 1 ETF, Over 1,000 Companies

ETFs have an unbeatable advantage over other investment products: With just one ETF, you can invest in over 1,000 companies across different countries and industries. -> This eliminates the company-specific risk associated with individual stocks. In an ETF, individual securities are balanced by others in the portfolio.

Market Risk Market risk refers to factors that can affect the entire market. For example, changes in interest rates or economic policies can impact the stock market as a whole. When investing, you cannot avoid market risk, and it cannot be mitigated through diversification.

Significantly Cheaper Than Comparable Investment Products

Compared to all other investment products, ETFs have low fees.

The Total Expense Ratio (TER) for popular indices typically ranges from 0.05% to 0.7% per year.
In contrast, traditional actively managed funds usually charge 1.0% to 2.5% annually of the invested amount.

Costs of ETFs Compared to Other Investment Products:

Financial Product	Average Costs
ETFs	0.05% – 0.7% (TER - Total Expense Ratio)
Actively Managed Funds	~1.85%
Stocks, Bonds, Commodities, etc.	0.1% – 0.5% (account fees) + trading fees + commissions (varies by provider).
Certificates	2% – 10%
Futures	0.1% – 0.5%

Clear Rules – High Transparency

As an investor, you know exactly what happens to your money, how it is secured, and how the returns are used.
Your money is invested in the stocks of a specific index, protected as special assets (Sondervermögen), and your returns are either distributed as dividends or reinvested.
You can research who publishes the index and the criteria companies must meet to be included.
ETFs invest fully automatically in the stocks represented in the index. There is no management team that can make wrong decisions or be driven by emotions. The strategy remains consistent: Replicate the index as accurately as possible.

Easily Convertible into Cash

An investment is considered liquid if it can be quickly converted into cash by selling the security.

Stocks are highly liquid compared to other assets like commodities or real estate, as they can be traded daily during market hours.
Since an ETF consists of stocks, you can trade your ETF shares on the stock exchange just like individual stocks, making them highly liquid.

Protected from Insolvency

In Germany, assets invested in ETFs are classified as special assets (Sondervermögen). According to Section 92 of the German Capital Investment Code (KAGB), your assets are held separately from the operating assets of the ETF provider.

-> If the capital management company holding your assets goes bankrupt, the ETF assets are not part of the insolvency estate. This means that even if your ETF provider goes bankrupt, your money will be returned to your account.

Savings Plan Compatibility

If you want to invest in ETFs regularly, you can easily set up a savings plan (Sparplan). Through your broker, you can specify the interval (e.g., monthly) and the amount you want to invest. Some brokers even allow you to start with as little as €1 per month.

Reference

Die Vorteile von ETFs

ETF Disadvantages

Fri, 07 Mar 2025 00:00:00 +0000

💡 Take Away

Disadvantages of ETFs

Short-Term Volatility: ETFs can fluctuate significantly in the short term but tend to perform well long-term, making them unsuitable for short-term investments.
No Direct Ownership: You own shares of the ETF, not the underlying companies, so you have no voting rights at shareholder meetings.
Temptation to Trade Frequently: Easy trading can lead to speculation instead of long-term investing.
Impact on Financial Advisors: ETFs are low-cost and accessible, reducing the need for financial advisors.
General Investment Risks: ETFs are subject to risks like market risk, liquidity risk, and tracking error.

Not All ETFs Are the Same

While ETFs are generally a promising way to invest broadly diversified with minimal effort, not all ETFs offer the same level of diversification.

Some ETFs are theme-focused and invest in narrower sectors compared to a global ETF.
The Consumer Advice Center (Verbraucherzentrale) warns that some index providers create indices specifically to include certain companies in an ETF.

-> ETF is not a guarantee of a worry-free, good investment.

Prices Can Fall for a Long Time

The price of an index or ETF can fluctuate significantly in the short term. During crises, it may even fall for years!
Volatility always carries a certain level of risk. You need to understand your risk tolerance and decide whether the potential returns are worth the risk.
If you plan to invest your money for only a short period, an ETF may not be the right choice for you.
However, historically, indices have always recovered from crises over the long term.

Voting Rights Belong to the Shareholder

Stocks represent ownership in a company. With common shares, the most common type of stock, you gain voting rights in the company. If you own common shares, you can participate in shareholder meetings and vote on matters such as dividend payouts.

When you invest in an ETF, you own a share of the fund, not the underlying stocks directly.

In the case of physically replicating ETFs, the ETF provider exercises the voting rights.
For synthetic ETFs, the voting rights remain with the shareholder of the underlying stocks.

No Reward or Punishment Mechanism

When you actively pick stocks, you can influence the market. You can

reward companies you believe are performing well by buying more shares, and
punish underperforming companies by selling their shares.

This stock-picking is an important control mechanism for a functioning market economy.

However, with passive investing, this mechanism disappears. As an individual, you benefit because you don’t need to analyze individual companies and can save time.

Constant Availability Can Encourage Speculation

ETFs are traded on the stock exchange, meaning they can be bought or sold during market hours. This constant availability might tempt investors to speculate. Using ETFs for speculation means using a passive product for an active strategy. While this is possible, it undermines the main argument for passive investing: betting on the long-term positive growth of the market.

Financial Advisors Earn Less in Commissions

Accessible, transparent, and cost-efficient—ETFs are particularly attractive to small investors. Passive investing opens up the stock market to a wider audience, leading more and more investors to manage their investments themselves. People are educating themselves independently and investing on their own.

Financial advisors are feeling the impact: If you make a purchase through them, they earn a commission. If you handle your investments yourself, they earn nothing. This disadvantage, however, only affects a specific group: bank and investment advisors.

Reference

Die Nachteile von ETFs

Risk

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ETF Risk

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💡 Take Away

You can’t completely avoid risk when investing—returns are the reward for taking that risk.
Market risk affects all investments and refers to stock market fluctuations (volatility).
Niche ETFs investing in illiquid assets can become hard to sell during market downturns.
Panic selling often happens when prices drop sharply, but patience helps ride it out.
Swap-based ETFs and those lending securities carry counterparty risk, though usually backed by collateral.
Currency risk exists when investing in foreign currencies, but major ETF currencies are generally stable.

Returns Through Risk

Return (Rendite) is the profit you make from an investment.
- In the stock market, it’s the reward for taking risks—the higher the risk, the higher the potential return, if things go well.
Volatility measures how much a security fluctuates; higher volatility means greater risk.
You only lose money when you sell at a loss—before that, it’s just a paper loss.
Diversifying your portfolio reduces the impact of individual stocks.
Every investment has risks, but being aware of them helps you develop strategies to manage and minimize them

Different ETF Risks

Market Risk

Exceptional situations, such as the COVID-19 pandemic, can impact the entire market. In such cases, every company is affected to some extent. You can not avoid market risk when investing—it exists for both individual stocks and global ETFs.

The best way to manage this risk is to invest for the long term. This allows you to ride out crises instead of panic-selling your shares. Unlike company-specific risks, market risk can not be diversified away.

Liquidity Risks in Niche ETFs

Some ETFs track cryptocurrencies, gold mines, or real estate assets. During crises, highly specialized ETFs may face liquidity shortages.

This happens when the underlying securities are illiquid, meaning they are traded infrequently.
In the worst case, you might not be able to access your money immediately if you want to sell your ETF shares 😱. However, such situations are rare in practice. This risk is not inherent to ETFs in general but arises because some ETFs are highly theme-focused.

We recommend investing in broadly diversified global ETFs instead.

Panic Selling

Triggered by a specific event, many ETF investors might decide to sell their shares simultaneously. -> When many sell, the supply increases, and the price drops. -> The lower price, in turn, may encourage even more investors to sell their shares.

Panic selling can occur with any type of investment. ETFs come with relatively high volatility, and prices can sometimes fall for years. Investors should avoid making rash decisions in response to market conditions.

Panic Selling

Stock prices can fluctuate significantly. When a stock drops abruptly, investors fear a sharp loss in value and rush to sell their shares to save as much of their capital as possible. This further drives prices down, creating a downward spiral. This phenomenon is called panic selling. Panic selling can significantly worsen economic crises.

Swap Counterparty Risk

Synthetic ETFs do not directly purchase the individual assets of an index but replicate it through a financial derivative. The ETF provider enters into a swap agreement with a financial institution (the swap counterparty). This introduces counterparty risk: Theoretically, the swap partner could go bankrupt, jeopardizing the ETF’s returns.

According to EU regulations, the performance difference between the collateral portfolio and the swap portfolio must not exceed 10%. If this threshold is breached, the swap must be reversed. For example, if the MSCI Emerging Markets is at €100 and the collateral portfolio is at €110, the swap must be reversed at that point. The same applies if the MSCI Emerging Markets is at €100 and the collateral portfolio is at €90. Most ETF providers reverse the swap well before reaching the 10% threshold.

Securities Lending

Some ETFs lend out securities and receive a lending fee from the borrower. This generates additional income, which is usually passed on to you as an investor.

-> Risk: If the borrower goes bankrupt, they may not be able to return the securities.

In Europe, the maximum amount of securities that can be lent out is 20% of the portfolio value.
The borrower must provide collateral, such as government bonds or cash, to the lender. If the value of this collateral exceeds 20% of the portfolio value, the ETF can lend out more securities.
As an investor, you are protected from significant losses.

Currency Risk

Some of the largest funds, including certain MSCI World ETFs, are denominated in US dollars.
Like any currency, the dollar fluctuates against the euro.
- If the dollar is worth less at the time of your sale compared to when you bought it, your returns will suffer.
- This currency risk can also be an opportunity if the exchange rate moves in your favor.
For long-term, globally diversified investors, these fluctuations largely balance out. (Mathematically, exchange rates are a zero-sum game.)

Conclusion

Like any investment, ETFs come with risks. However, most risks are well-hedged and therefore do not necessarily pose a disadvantage for you.

As an ETF investor, you are most exposed to market risk. By investing in broad market segments, you bear the full impact of market fluctuations. Historically, the global economy has always shown positive long-term growth. Early investors who remained patient and held their shares for the long term were rewarded 💪.

Reference

Risiken beim Investieren in ETFs

Reduce Risk in the Stock Market

Fri, 07 Mar 2025 00:00:00 +0000

💡 Take Away

Your ETF can lend securities or swap returns with financial institutions. If the counterparty defaults, your investment is typically well-protected.
You can eliminate company-, sector-, and country-specific risks by diversifying your investments broadly.
Market risk affects all investors, but long-term investing usually smooths out short-term fluctuations.
Mean reversion refers to prices trending toward an average over time—historically, the MSCI World has returned about 7% annually.
Avoid panic selling during short-term declines; over time, returns are generally positive.

Like any investment, ETFs carry risks. In return for investing your money, you are rewarded with potential returns. A general rule of thumb is: the higher the risk, the higher the possible return—assuming the investment performs well.

However, you are not completely at the mercy of risk. You can strategically choose where to take risks and keep them relatively low through diversification and informed decision-making.

Don’t Put All Your Eggs in One Basket

Relying on a single company is risky due to factors like competition, regulations, and management. The same applies to industries and countries, as their future performance is hard to predict.

You can eliminate company-, sector-, and country-specific risks through diversification.

Instead of picking a few stocks, invest in hundreds or thousands of companies across industries, regions, and continents.
The easiest way to achieve this is by investing in globally diversified ETFs, reducing the impact of company bankruptcies, regional downturns, or industry slumps on your portfolio.

Individual Stocks vs. Germany vs. Global Index

Compare the performance of 3 German companies (Fresenius, Siemens, and BMW) with DAX and a globla index (from year 2002 to 2021):

Aspect	Fresenius, Siemens, BMW	DAX (German Stock Index)	MSCI ACWI IMI (Global Index)
Composition	3 German Large-Cap Stocks	40 German Large-Cap Stocks	~9,150 Stocks from 39 Countries
Diversification	Poor	Moderate	Very High
Annual Return (Nominal)	5.2%	5.6%	8.7%
Volatility	27.7%	24.4%	19.8%
Maximum Drawdown	-55.5%	-43.9%	-42.0%

The global index shows the highest nominal returns (before taxes and deductions) and lowest volatility (less variation in annual returns).
The maximum drawdown (largest observed loss) is also lowest in the globally diversified index.

This suggests that broader diversification leads to higher stability and better risk-adjusted returns compared to focusing solely on individual stocks or a national index.

Long-Term Stable Returns

Even well-diversified ETFs like the MSCI ACWI IMI Index have experienced varying returns and losses over the years. If you had sold shares just before a downturn and needed to sell again at that moment, you would have incurred a loss. Therefore, it’s essential to consider how much money you can set aside for the long term.

Over a 10 to 15-year period, investors have consistently achieved positive returns. Holding investments over the long run allows you to ride out market downturns and benefit from lower prices. The longer you hold ETFs, the more their returns tend to align with an average value — a statistical effect known as regression to the mean. Holding MSCI World ETFs for an extended period reduces the impact of short-term fluctuations on overall returns.

A study comparing MSCI World portfolios from 1969 to 2018 shows how average returns evolve over different holding periods. The graph illustrates the worst (red), best (green), and average (blue) performances for holding periods ranging from 1 to 40 years, highlighting the benefits of long-term investing.

Avoid Panic Selling

If you had sold at the worst possible moment, you would have realized a loss. However, if you had waited out the downturn, you would have seen gains after 10–15 years. It’s important to stay calm, even when your portfolio shows losses for a while. Historically, the stock market has always recovered over time 📈.

Risk-conscious Investing Pays off

There is always a residual risk that cannot be diversified away: an emergency might arise, requiring a large sum of money, or the economy could enter a crisis. That’s why you should only invest as much as your personal risk tolerance allows.

Your acceptable risk level depends on factors such as age, life stage, income, and personal circumstances. Asset allocation helps you determine the right balance between risk-free and risk-bearing asset classes in your portfolio.

Reference

So reduzierst du Risiken am Aktienmarkt

Create Risk Profile

Fri, 07 Mar 2025 00:00:00 +0000

💡 Take Away

Your risk tolerance depends on factors like age, income, personality, responsibilities, and individual circumstances.
Allocate your investments: Decide how much to invest in risk-free assets vs. riskier assets.
Riskier investments (e.g., individual stocks, ETFs, REITs, commodities) generate returns.
Low-risk investments cushion portfolio fluctuations. Options include: Savings accounts (Tagesgeld), Fixed-term deposits (Festgeld), Cash, and Government bonds from AAA-rated countries.
Risk tolerance can change over time as your life circumstances evolve.

No Investment Without Risk!

Investing in the stock market always involves risks. You can counteract and minimize these risks with a solid strategy, but you can NOT eliminate them entirely. It’s important to

be aware of the risks and
tailor your investments to your personal risk tolerance

How Risk-Tolerant Are You?

Your investment strategy should fit your personality, allowing you to sleep soundly during market fluctuations. Otherwise, you risk selling at the wrong time and losing money.

This defines your personal risk tolerance which is reflected in how much volatility and loss you can endure before changing your behavior (more see Rick Ferri’s book “All About Asset Allocation”). You often only discover how market fluctuations affect you once you start investing. Many people overestimate their risk tolerance and only realize it after experiencing a loss following years of gains.

Diversify Your Wealth

You should never rely on just one type of investment. Instead, divide your wealth across different asset classes, each carrying its own risks. By allocating your wealth, you can create a portfolio that matches your risk profile.

Asset Allocation in 2 Steps

Decide how much of your money goes into riskier investments and how much into risk-free assets.
- The risk-free portion lowers your overall risk and provides the security you need.
- The riskier portion generates returns.
Fill these categories with specific investment products.

Build an Emergency Fund

Regardless of your investments, you should build an emergency fund. Depending on your life situation, keep around 3 months’ net salary in a checking or savings account.

Risky investments

Risky investments are those without guarantees but with significant fluctuations.

The higher the volatility, the greater the risk.
The higher the chance of the investment failing, the more potential reward you can earn.

Examples of Risky Investments

Individual Stocks
Stock ETFs and Index Funds
REITs (Real Estate Investment Trusts)
Corporate Bonds
Low-Rated Government Bonds
Cryptocurrencies
P2P Lending

These investment types vary in risk. For example, an individual stock is riskier than a stock index fund, and stocks themselves differ in risk levels. Research the risks of each investment type and weigh them against the expected returns.

Government Bonds

With a government bond, you lend money to a country (e.g., Germany) for a fixed period. In return, you receive a coupon, a fixed interest rate. Countries are rated based on their creditworthiness. The highest rating is AAA, and the lowest is D (indicating the country is in default).

Low-risk investments

The low-risk portion of your portfolio reduces overall risk and cushions fluctuations. Remeber: It is not meant to generate high returns! Truly risk-free investments do not exist—even cash in your wallet carries some risk. However, certain investment types have proven to be low-risk over time.

Examples of Low-Risk Investments

Fixed-Term Deposits (Festgeld) in euros, up to €100,000 in countries with the best credit ratings.
Savings Accounts (Tagesgeld) in euros, up to €100,000 in countries with the best credit ratings.
Government Bonds from countries with AAA ratings (e.g., Germany, Luxembourg, Netherlands).
Cash

Avoid risky foreign banks for savings or fixed-term deposits. Earning 1% interest from unstable banks is not worth the risk.
While the interest rates on bonds from riskier countries like Greece or Italy may be high, they are not suitable for the low-risk portion of your portfolio.

Finding the right balance

The risky portion of your portfolio generates returns, while the low-risk portion provides stability by reducing overall fluctuations. These two parts complement each other.

Example

If you invest half your wealth in risky assets and the stock market drops by 30%, your portfolio’s value will only decrease by 15% because the other half is in stable investments. Conversely, if your stocks rise by 30%, your portfolio will only gain 15%.

This table shows how a market downturn affects your portfolio based on the percentage of risky assets you hold:

What Determines Your Risk Tolerance

Age, responsibilities, and need for security: Risk tolerance is highly individual.

Generally, younger people can afford to take more risks because they have many years of earning potential ahead. They also have more time to ride out crises and buy shares at lower prices during downturns.

💡 Rule of Thumb

100 – Your Age = Risk Allocation in %

This simple formula helps you calculate your risk tolerance:

At 20 years old, you could allocate 80% to risky investments.
At 60 years old, you might allocate 40% to risky investments.

While age is important, other factors also influence your risk tolerance:

A high salary allows you to take on more risk.
Financial education increases your confidence and security.
Your ongoing financial obligations also play a role.

Questions to Determine Your Risk Tolerance

How old are you?
Do you earn a high income?
Do you already have significant wealth?
Are you financially knowledgeable?
Do you have loans or mortgages to pay off?
Are you financially responsible for others?

These are just some of the relevant factors. Individual circumstances, such as health, may also play a role.

Consider how much risk you can and are willing to take. Decide how much to allocate to risky investments and how much to low-risk assets, then choose suitable products for each category.

Risk Tolerance Can Change Over Time

Your life situation may change (e.g., starting a family, having children, or changes in income).
You gain experience over time. The first market downturn is a new experience for every investor, but you’ll learn that fluctuations are normal.

Reference

Risikoprofil für deine Geldanlage erstellen

Strategy and Portfolio

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The Concept of the World Portfolio

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💡 Take Away

The world portfolio is based on various financial theories, such as the Efficient Market Hypothesis and the Capital Asset Pricing Model (CAPM).
For private investors, globally diversified index funds are suitable. These aim to represent the global economy while minimizing risk through broad diversification.
Financial professionals develop different implementations of the world portfolio, such as the ARERO World Fund and Multi-Factor Investing.

Theoretical Background

By combining some of the financial theories, the foundation is created for the rationale behind investing in a world portfolio.

Markets Are Efficient

Efficient Market Hypothesis (EMH): efficient markets reflect all available information in their prices

If we assume that markets are efficient, then a stock has a value of X because it accurately reflects all relevant information.
As a result, it is impossible for an individual investor to consistently outperform the market in the long run.
- This means that market forecasts published by analysts are ultimately irrelevant.

Capital Asset Pricing Model (CAPM)

This model focuses on pricing in financial markets, specifically the relationship between expected return and expected risk.

The higher the risk, the higher the return.
It has proven useful for private investors, which is why it serves as a theoretical foundation for investing in a world portfolio.

Why a World Portfolio?

To minimize risk, there is one key tool: diversification.

The maximum level of diversification is achieved by investing in everything available (which is why the term “world” is used in “world portfolio.”)
While no world index can truly capture everything, it provides broad exposure at low costs.

Diversifying

avoid individual company risk, which is inherent in stock picking (selecting individual stocks)
minimize regional risk, helps eliminate the so-called “home bias”—a psychological tendency where investors prefer to invest in companies from their home country.

With a buy-and-hold strategy, you avoid the gambling-like nature of market timing. Successfully predicting the best times to enter and exit the market is extremely difficult. By holding your investments for the long term, you eliminate the reliance on luck.

How Is the World Portfolio Implemented?

Different people implement the world portfolio concept in different ways.

ARERO World Fund

ARERO: “Aktien – Renten – Rohstoffe” (stocks – bonds – commodities)
The fund allocates 60% to global stocks, 25% to European bonds, and 15% to commodities.

Gerd Kommer's Approach

Combines global investing with multi-factor investing
Aims to integrate multiple return-enhancing factors, such as small-cap stocks and value stocks

DIY World Portfolio with ETFs

An MSCI ACWI-based ETF covers a large portion of the global economy.
A 70/30 portfolio splits investments between a global index and an emerging markets index.

The variety of world portfolio strategies exists because it is impossible to fully replicate the entire global economy. Every version focuses on certain aspects while leaving others out. Therefore, choosing a specific world portfolio variant is more a matter of personal preference rather than a strict theoretical difference.

Reference

Das Konzept Weltportfolio erklärt

World Index Overview

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

Many indices determine inclusion based on market capitalization or stock value.
Global indices, such as the MSCI All Country World Index (MSCI ACWI) or the FTSE All World Index, are weighted by market capitalization.
- The MSCI ACWI, published by Morgan Stanley Capital International, includes approximately 2,900 companies.
- The FTSE All World Index, from the Financial Times Stock Exchange Group (FTSE), consists of about 3,900 companies.
Many global indices have a high proportion of U.S. companies due to the large number of high market capitalization firms in the U.S.
Index providers also offer specialized indices focusing on emerging markets, Europe, and small-cap companies.

What is a World Index?

A world index is an index composed of (stock) assets from around the world.
- If an index provider weights exclusively by market capitalization, the result is a strong focus on North America.
- You can also weight your world portfolio according to economic performance, measured by Gross Domestic Product (GDP).
The selection of the index on which your ETF is based is already a decision for a specific perspective on the global economy, which significantly influences performance.
World indices are typically divided into developed and emerging markets.

Well-Known World Indices in Comparison

Global Indices

Index	Description
MSCI ACWI	The MSCI All Countries World Index tracks over 2,900 stocks from 23 developed and 24 emerging markets. The share of emerging market stocks is around 10%. U.S. companies have the largest weight, making up approximately 60% of the index.
FTSE All-World	The FTSE All-World Index includes around 3,900 stocks from approximately 50 countries, covering large- and mid-cap companies. It weights companies based on market capitalization.

Major Global Indices

Index	Description
MSCI World	The MSCI World Index (Morgan Stanley Capital International World Index) is a key stock market indicator reflecting global economic development. It includes over 1,600 stocks from 23 developed countries.
FTSE Developed World	This index tracks around 2,100 individual stocks. Although it includes more companies than the MSCI World, its performance is similar, as the additional stocks are mostly smaller companies.
MSCI Emerging Markets	The MSCI Emerging Markets Index tracks around 1,200 large- and mid-cap stocks from 24 emerging markets. Stocks are weighted based on free-float market capitalization and currently account for around 13% of the global market capitalization. Combined with the MSCI World, it provides comprehensive global stock market exposure.
FTSE Emerging Markets	The FTSE Emerging Markets Index tracks approximately 1,700 large- and mid-cap stocks from 24 emerging markets. The stocks included represent about 13% of global market capitalization.
Stoxx Europe 600	The Stoxx Europe 600 is a regional European index rather than a global one. Provided by the Swiss index provider Stoxx, it includes 600 companies that represent over 90% of the European market capitalization, covering small-, mid-, and large-cap stocks. A Europe-focused index can help reduce the U.S. dominance in a portfolio.
MSCI World Small Cap	The MSCI World Small Cap Index tracks small-cap companies from developed markets. It can serve as a valuable complement to a global portfolio by adding exposure to smaller firms.

MSCI vs. FTSE

Both Morgan Stanley Capital International (MSCI) and Financial Times Stock Exchange (FTSE) offer comparable indices: The MSCI World is similar to the FTSE Developed World, as are the MSCI Emerging Markets and FTSE Emerging Markets. The same applies to the MSCI ACWI and FTSE All-World.

Product Comparison:

Product	Morgan Stanley Capital International (MSCI)	Financial Times Stock Exchange Group (FTSE)
World Index	MSCI ACWI (approx. 2,900 stocks in 48 countries)	FTSE All-World (approx. 3,900 stocks in ~50 countries)
Regional Index for Companies from Developed Countries	MSCI World (approx. 1,600 stocks in 23 countries)	FTSE Developed World (approx. 2,100 stocks from 26 countries)
Regional Index for Companies from Emerging Markets	MSCI Emerging Markets (approx. 1,300 stocks in 24 countries)	FTSE Emerging Markets (approx. 1,700 stocks from 24 countries)

The biggest difference: weighting of different regions and the decision about which countries are included in which index

For FTSE, South Korea falls under the category of developed countries and is therefore part of the FTSE Developed World Index. MSCI classifies the country as an emerging market, so it appears in the MSCI Emerging Markets index.
What will be particularly interesting in the future is the classification of China. Currently, both providers classify the world’s second-largest economy as an emerging market.

Ultimately, the choice between MSCI and FTSE comes down to personal preference and cost considerations. Regardless of your decision, make sure NOT to mix the two index providers, or important positions may become overweighted or excluded.

For more detailed comparison, check out this video:

Reference

Weltweite Aktienindizes im Überblick

Regional Weighting in the World Portfolio

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The method used to weight countries and companies in an index can lead to differences in performance. Most (global) indices are weighted by market capitalization, meaning they are based on the value of publicly traded companies.
As a result, there may be discrepancies compared to a country’s actual economic output, which is reflected in its Gross Domestic Product (GDP).
MSCI indices like the MSCI World or MSCI ACWI tend to have an overweight allocation to U.S. stocks compared to the U.S. share of global GDP.
To balance out such overweight allocations, regionally focused indices can be used, such as the STOXX Europe 600, which specializes in European companies with small, mid, and large market capitalizations.

Indices Are Usually Weighted by Market Capitalization

Most global indices, such as the MSCI ACWI, track the global economy based on market capitalization. This means they automatically weight companies according to their value on the stock exchange. The formula for market capitalization is:

$$ \text{market capitalization} = \text{\#outstanding shares} \times \text{stock price} $$

For a country’s economy, market capitalization represents the total value of all publicly listed companies.
The weighting of different countries in global indices like the MSCI World is determined by the total market capitalization of the included companies.
Advantage: automatic rebalancing
- Countries and companies are classified primarily based on their market capitalization
  
  E.g., if a country transitions from an emerging market to a developed economy, it can be automatically included in the corresponding index for developed markets (such as the MSCI World in the MSCI index family).
- Other factors also play a role, such as the proportion of freely tradable shares.

Is the USA Overrepresented?

The aforementioned weighting can be seen as problematic because a large portion of the global economy operates outside the stock markets—in privately held companies.

In the USA, nearly 150% of USA’s economy is market capitalized. This is because many multinational corporations, like Facebook, are headquartered in the U.S., earning revenue globally but being listed on U.S. stock exchanges. This means that the value of U.S. companies exceeds the value of the U.S. economy itself.

Market Capitalization to GDP Ratio

The Market Capitalization to GDP Ratio compares the total market value of a country’s publicly traded companies (stock market capitalization) to its Gross Domestic Product (GP)

It is often used to assess whether a country’s stock market is overvalued or undervalued relative to its economy:

Ratio > 100% → The stock market is larger than the country’s economy, indicating that publicly traded companies have a high valuation.
- This is common in countries like the U.S. (around 150%), where many global corporations are listed domestically.
Ratio < 100% → The stock market is smaller than the economy, meaning a significant portion of economic activity comes from private or non-listed companies.
- For example, in Germany (~50%), many large companies (e.g., Bosch, Aldi) are not publicly traded.
Ratio around 75-100% → The stock market and the economy are roughly in balance.

This situation contributes to the high weighting of the U.S. in market-capitalization-based indices.

While the U.S. makes up 55% of the MSCI ACWI, in EU countries, only a little more than half of GDP is market capitalized, meaning the U.S. overweighting comes at the expense of regions like Europe.

Another factor affecting the balance is company size selection based on market capitalization.

The MSCI World index only includes large- and mid-cap companies, covering 85% of a country’s market capitalization.
However, small-cap stocks, which represent 15% of economic activity, are excluded from the index.

Weighting by GDP as an Alternative

Those who find the weighting of world indices (such as MSCI ACWI) problematic can counteract this by orienting towards GDP-based weighting.

Advantage: Minimize the concentration risk that arises from the tendency to overweight the United States, ensuring broader regional diversification
Allow for a more accurate reflection of the global economy
Open up new opportunities for returns through a stronger emphasis on emerging markets, which are underrepresented in terms of market capitalization.
Challenge: the need for rebalancing, as the relative shares of different GDPs change dynamically over time.

Using Regional Indices for Balance

Easy and stress-free ways to counteract imblances and align more with GDP-based weighting

Overweight emerging markets by increasing the proportion of emerging markets in a mixed index portfolio made up of the MSCI World and MSCI Emerging Markets.
Add an index like the STOXX Europe 600, which includes large, mid, and small-cap companies from Europe. ( Europe is much more strongly represented in a GDP-based weighting compared to a market capitalization-based one. )

Strengthening with Small Caps

Including indices that focus on small-cap companies can be a valuable addition, as small (and mid) caps are underweighted in the MSCI World indices.

Example:

MSCI Europe Small Cap index specifically targets small caps from the European region
STOXX Europe 200 Small

Reference

Regionale Gewichtung im Weltportfolio

ETF Portfolios

Fri, 07 Mar 2025 00:00:00 +0000

A portfolio refers to the collection of investments, which can be structured with various weightings and asset classes. Here, we’ll look at well-known ETF portfolios with examples.

70/30 Portfolio

The 70/30 portfolio is a classic among portfolios with global ETFs.

It is a combination of the MSCI World and MSCI Emerging Markets indices, typically allocating 70% to MSCI World and 30% to MSCI Emerging Markets.
offers broad exposure to both developed and emerging markets, providing a balanced approach to global diversification.

Variant 1

HSBC MSCI World ETF (dist) + Xtrackers Emerging Markets ETF (ACC)

Both ETFs are characterized by a fund volume greater than 100 million euros and a low Total Expense Ratio (TER).

Variant 2

Alternatively, you can also use the products from FTSE. With the FTSE Developed World and FTSE Emerging Markets, there are two very similar ETFs. The differences and similarities of world indices are discussed in this article. It is important to note that mixing the two index providers is NOT advisable, because they have different methodologies and weightings, which could lead to imbalances in your portfolio.

Check this article to learn how to build a 70/30 portfolio and what you should consider in detail.

Gerd-Kommer-World Portfolio

Important components of this portfolio include a stable, risk-free part and a risky part for generating returns.
Building the entire portfolio according to Gerd Kommer is quite complex and not recommended for beginners.

if you want to adopt some parts of the Kommer Portfolio, the following ETFs could be used as examples:

For the risk-free part, one of these short-term government bonds could be added:

Check out this detailed article on Gerd Kommer’s world portfolio.

Allwetter-Portfolio

The All-Weather Portfolio, designed by hedge fund manager Ray Dalio, aims to withstand all market storms. It focuses on four asset classes: bonds, stocks, gold, and other commodities. The All-Weather Portfolio can be fully replicated using ETFs.

Example:

Pantoffel Portfolio

The Pantoffel Portfolio, created by the consumer organization Stiftung Warentest and its magazine Finanztest, gets its name from the comfort it provides once set up. It comes in three variations, depending on risk tolerance or need for security. This portfolio is considered beginner-friendly and well-suited for relaxed, long-term investing.

Sustainable 70/30 Portfolio

A sustainable world portfolio represents the global economy while excluding unethical investments

The definition of what is considered unethical varies
Common standards include ESG (Environmental, Social, and Governance) and SRI (Socially Responsible Investing) labels.
The classic world portfolio can be reconstructed based on these criteria.

Example 1

The ESG and SRI labels differ in that SRI applies significantly stricter criteria, completely excluding any stocks from the parent index that do not meet its standards.

Example 2

Just One ETF

This is possible with the MSCI All Countries World Index (ACWI), which combines stocks from both developed and emerging markets.

Variant: iShare

Variant: Vanguard FTSE All-World

Dividends

If you prefer a world portfolio with high distribution yields, you can best achieve this with dividend ETFs. This is purely a matter of personal preference, as the total returns do not differ from a non-dividend-oriented ETF world portfolio.

Suitable options

Following 70/30 world portfolio: SPDR S&P Global Dividend Aristocrats UCITS ETF (70%) and the SPDR S&P Emerging Markets Dividend Aristocrats UCITS ETF (Dist) (30%). Both ETFs use optimized sampling for physical replication, have solid fund volumes, and are available through brokers like DKB.
Vanguard FTSE All-World High Dividend Yield UCITS ETF Acc: tracks the FTSE All-World High Dividend Yield Index and stands out with a low TER (Total Expense Ratio).

Stocks + Commodities + Real Estate

Many investors prefer to complement their stock investments with a small allocation to commodities and/or real estate to complete their world portfolio. This can be easily achieved by adding:

REITs (Real Estate Investment Trusts) for real estate exposure
Commodity ETFs or ETCs for commodities

This diversification helps reduce risk and increase stability in different market conditions.

Recommendation for commodities is the L&G Commodities ETF, which has a good fund volume and reasonable pricing. It synthetically tracks assets in the following sectors:

Energy (22.8%)
Precious Metals (19.1%)
Agriculture (33.1%)
Industrial Metals (19.7%)
Livestock (5.3%)

An alternative option is the iShares Diversified Commodity Swap, which also synthetically replicates commodity assets.

Recommendation for real estate exposure is HSBC NAREIT, which focuses on listed real estate companies in developed countries.

The regular MSCI World already includes real estate companies, so adding this ETF would lead to an overweight position in real estate, making it a preference-based decision.

50/30 Portfolio with More Europe

Due to the tendency for the United States to be overweighted in traditional global index ETFs (like those from MSCI) relative to GDP, as a result of the market capitalization-based weighting, some investors prefer to add more European stocks to their portfolios. A good option for this is an ETF based on the STOXX Europe 600 Index.

Example:

Reference

ETF-Portfolios im Überblick

70/30 Portfolio - The Classic Global Portfolio

Wed, 19 Mar 2025 00:00:00 +0000

💡Take Away

The 70/30 portfolio is a simple way to build a globally diversified investment portfolio.
It invests broadly in stocks, with 70% allocated to developed markets and 30% to emerging markets.
Developed markets are passively tracked using ETFs like the MSCI World, while emerging markets are typically represented by an MSCI Emerging Markets ETF.

👉 How to Proceed

Use ETF search tool to find suitable ETFs that cover developed and emerging markets. Apply filters for costs and fund size.
Preferably choose the same index provider for both developed and emerging markets.
Invest in ETFs with a fund volume of at least €100 million and a minimum track record of 3 years.

What is the 70/30 Portfolio?

The 70/30 portfolio is a type of globally diversified investment portfolio.

It invests broadly in stocks—70% in developed markets and 30% in emerging markets—following a passive investment approach. This means that instead of selecting individual stocks, investors track the overall market, making it a simple investment strategy.
Since the 70/30 portfolio consists entirely of stocks, it represents the riskier part of a broader investment strategy. Depending on your risk profile, adding a lower-risk component might be beneficial. However, the 70/30 ratio within the stock portion remains unchanged.

What Does the 70/30 Portfolio Consist of?

The 70/30 portfolio is built using just two indices:

70% for developed markets (e.g., MSCI World).
30% for emerging markets (e.g., MSCI Emerging Markets).

These two indices together provide broad global diversification.

Developed Markets (70%)

The most commonly used index for developed markets is the MSCI World. There are many ETFs tracking this index, often with large fund volumes. The largest global ETF is also based on the MSCI World.
An alternative to the MSCI World is the FTSE Developed index. However, the selection of ETFs tracking this index is significantly smaller.
Another option is the Solactive GBS Developed Markets Large & Mid Cap index. However, the availability of ETFs tracking this index is also limited.

Emerging markets (30%)

Emerging markets are typically represented by the MSCI Emerging Markets index. This index is widely used by fund providers when they want to track the stock markets of emerging economies.

‼️Attention

The classification of countries into developed and emerging markets varies between index providers. For example, South Korea is classified as an emerging market by MSCI, but as a developed market by FTSE. Therefore, it is advisable to use the same index provider for both developed and emerging market allocations in your portfolio to maintain consistency.

Advantages

Advantages of the 70/30 Portfolio:

Globally diversified

The 70/30 portfolio offers broad global diversification by investing in both developed and emerging markets.
Low complexity

The portfolio consists of only two ETFs, making it easy to manage and implement without complexity.
Can be implemented with many ETFs

There is a large range of ETFs that can be used to implement this portfolio
Low costs
Political risk premium for emerging markets

Investment in emerging markets is expected to offer higher returns due to increased political risk, such as lower legal security in emerging countries. The political risk premium has historically compensated for the risk taken.
Good risk-return ratio

Disadvantages & Criticism

While the 70/30 portfolio has many advantages, it also has disadvantages.

Annual rebalancing needed
One-ETF version is even simpler
Higher political risk in emerging markets

Examples

It’s best to use 2 ETFs from the same index provider, as the country classification may differ. When assembling the portfolio, you can filter the ETFs in ETF search by criteria such as costs or fund volume.

Especially Cost-Effective 70/30 Portfolios

When investing, it’s important to keep costs as low as possible. Therefore, ETFs with a low TER (Total Expense Ratio) are recommended.

Developed market ETFs
Emerging Markets ETFs

70/30 Portfolios with Particularly Large Funds

The larger a fund is, the less likely it is to be closed. Often, large ETFs are relatively inexpensive because the fund company can manage a large ETF at a lower cost.

Developed market ETFs
Emerging Markets ETFs

Reference

70/30-Portfolio – das klassische Weltportfolio

ETF Selection

Fri, 07 Mar 2025 00:00:00 +0000

Find the Right ETF

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

Particularly important criteria for selecting an ETF include its
- costs,
- fund size
  - A threshold of €50 million is considered sufficient.
  - Over €100 million is considered stable.
  - Over €150 million is a safe benchmark for larger funds.
- replication method
You can find this information in the ETF factsheet, on the provider’s website, or conveniently in our ETF search.
Knowing the tracking difference can help with selection. The distribution type is also part of the selection process based on personal preference.
Fund domicile and currency have less impact when choosing an ETF but can still serve as decision-making factors.

👉 How to Proceed

Use the search function at your broker or in ETF search to find suitable ETFs. Filters help narrow down the selection.
Then, compare the key facts listed in the factsheets or ETF search results.
Once you’ve chosen an ETF, you can buy or set up a savings plan for it using its ISIN at your broker, making it part of your portfolio.

Fund Volume: Bigger is Better

The term “fund volume” describes how much money is invested in an ETF.

A fund volume of €114 million means that a total of €114 million is invested in that ETF.
The fund volume indicates how established the ETF is in the market—the larger, the more established.
For ETFs tracking large global indices, the key threshold is around €100 million.

The larger an ETF, the more profitable it is for the provider. This can also benefit investors in terms of lower costs.

If an ETF does not perform as expected, the provider may remove it from the market. In such cases, investors are informed in advance (with a six-week notice period), allowing enough time to reallocate funds. -> So, no need to panic.

However, a small fund volume is not necessarily a disadvantage.

Many niche ETFs, though small, still perform well and remain profitable for providers.
A threshold of €50 million is considered sufficient. In general, a fund volume of over €150 million is a safe benchmark for larger funds.

Costs & Fees of ETFs

The costs of an ETF consist of

transaction costs for buying and selling shares

Occur once when buying or selling and depend on the brokerage account
- Some brokers offer commission-free ETFs, while others charge a flat fee or a percentage-based fee
Some brokers may charge an account management fee

the Total Expense Ratio (TER) of the ETF

Charged by the ETF provider and can be found in the ETF factsheet
Represents the total annual costs of an ETF, covering the fees the provider deducts directly from the fund volume to cover expenses

the spread as a price factor

The difference between the bid and ask price
It can become a significant cost factor, especially outside official trading hours and on weekends.

ETF savings plans have significantly changed cost structures. Compared to traditional order fees, they are often much more cost-effective for retail investors 👏.

Accumulating or Distributing?

If an ETF holds dividend-paying stocks or a bond ETF receives interest, there are two distribution methods to handle these earnings:

Accumulating (reinvesting): The ETF automatically reinvests the received dividends or interest, allowing the invested capital to grow.
- Ideal for long-term investors who want to grow their capital through the power of compound interest.
Distributing: The ETF pays out the dividends or interest directly to investors.
- Suitable for investors looking to generate a regular passive income from their investments.

Utilizing the Saver’s Lump Sum with distributing ETFs

By smartly distributing investments across both types of ETFs, one can invest in a tax-optimized manner. For all the important tax aspects of ETFs, check out guide on ETF & Taxes.

Overview of Replication Methods

The principle of ETFs is to replicate a specific index as accurately as possible, which is known as replication.

Common replication methods are

physical (full) replication

Replicate the index by holding physical securities in the same proportions
This is advantageous because it can most accurately reflect the values.

optimized sampling

Securities are also physically bought, but only the most important ones. Which ones are selected is determined by the sample.
This is particularly beneficial for ETFs with many securities.
This method helps reduce costs.

synthetic replication (swap ETFs)

Replicates the index using swaps (exchange transactions)
Mainly useful for niche markets and commodity ETFs
Sometimes, these replication methods are also combined, with larger positions held physically and smaller ones replicated synthetically.

Tracking Error and Tracking Difference: Deviation from the Index

One criterion for evaluating the quality of an ETF is the Tracking Difference

Measures the difference between the ETF’s performance and its benchmark index over a specific period
Can be positive (meaning the ETF outperforms its index) or negative
Various factors contribute to the Tracking Difference, including general costs, the replication method, and differences in withholding tax between the ETF and the index.
Although Tracking Difference and Tracking Error are often confused or used interchangeably, they represent different metrics!
Since the Tracking Difference does not show actual costs but rather opportunity costs (i.e., the theoretical lost returns), the Total Expense Ratio (TER) remains the primary cost metric for private investors.

Tracking Error vs. Tracking Difference

Metric	Definition	Focus	What It Measures	Ideal Scenario	Influenced by
Tracking Difference (TD)	The average difference between the ETF’s returns and the index’s returns over a period of time.	Long-term deviation	Measures the ETF’s overall performance compared to the index -> Shows whether the ETF outperforms or underperforms its benchmark.	Should be low and stable, ideally close to 0 or slightly positive.	Fees (TER), taxes, and reinvestment strategies.
Tracking Error (TE)	The volatility (standard deviation) of the ETF’s return deviations from the index’s return.	Short-term fluctuation	Measures how volatile the ETF’s tracking is on a daily, weekly, or monthly basis (using standard deviation) -> Measures how consistent the ETF is in tracking the index.	Should be as low as possible, indicating stable tracking.	Liquidity, market impact, and trading costs

Low TD + Low TE = A high-quality ETF ✅
Low TD but high TE: The ETF tracks the index well over time, but with significant short-term fluctuations 📈.
High TD but low TE: The ETF is stable but consistently lags behind the index (likely due to high fees).

For long-term investors, TD is typically more important than TE. However, if TE is too high, it may indicate that the ETF is not reliably tracking the index.

The Role of Currencies in ETFs

A currency often appears in the name of an ETF, such as EUR or USD. This is the fund currency, meaning the currency in which the fund’s assets are managed. However, the settlement is always done in the currency of your broker, so with a German broker, it would be in euros.

Due to the investment in securities in foreign currencies, there is a certain currency risk.

This reflects the possibility that the home currency’s exchange rate may rise relative to the foreign currency, thus reducing the value of the shares.

However, when investing in many ETFs (such as global ETFs), there is already strong diversification (including in terms of covered currencies). -> Currency risk often becomes a zero-sum game, and additional insurance only reduces returns.

The Fund Domicile

You can find out the so-called fund domicile by checking the ISIN, i.e., the International Securities Identification Number.

The first two letters indicate the fund domicile, for example, “DE” for Germany or “IE” for Ireland.

Most funds are established in Luxembourg or Ireland.

Luxembourg has long been established as a fund location, which is particularly advantageous for institutional investors.
Ireland offers slight tax advantages for certain securities transactions with the USA, which is why it is also an established fund domicile.

However, overall, it can be said that the significance of the fund domicile has strongly diminished for German investors, as German funds are no longer given tax preference. Only ETFs with a non-European fund domicile can cause difficulties, but these are rarely or never offered by German brokers. 🙄

Using the ETF Search Tool

ETF search from Finanzfluss

Which ETF is right for me?

The factsheets can be very helpful

They always include key information such as the performance of the benchmark index or the fund volume
They are kept up to date

It is always advisable to check with the factsheet or other documentation from the provider.

Reference

ETF Auswahl: So findest du den richtigen ETF

Fund Volume

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The fund size describes how much invested money is in an ETF.
ETF providers may remove ETFs from the market if they perform poorly. This risk is higher for new and small ETFs. We recommend ETFs with a fund size of at least €100 million.
ETFs with a large fund size usually have lower costs due to economies of scale.
If an ETF is liquidated, you will receive your money back and can reinvest it in a new ETF.

The more, the better

The fund size describes how much money all investors have collectively invested in an ETF. The higher the volume, the lower the fixed costs for the fund providers. These lower costs can then be passed on to investors.

ETFs with a high fund size often have a low Total Expense Ratio (TER). This scaling effect benefits you because it reduces the portion of your returns eaten up by costs.

Some ETFs of large fund size:

Providers test ETFs in a kind of trial period

Currently, over 2,900 ETFs are approved in Germany alone. Some of them focus on specific niches, industries, or regions. However, not all of these ETFs are successful in the long run.

That’s why providers test how an ETF performs over a certain period. If it fails to establish itself or does not attract enough capital, the provider may remove the ETF from the market.

What happens when an ETF is liquidated?

When an ETF is liquidated, the invested capital is sold off and returned to the shareholders. As an investor, you do not lose your money, but you will need to find a new ETF. However, reinvesting your money may incur additional costs.

If an ETF is set to be closed, the provider will notify you in advance. The notice period is six weeks. During this time, you should look for a new ETF that aligns with your investment goals. Once you have found a suitable ETF, you can reallocate your investment. After the notice period ends, the provider stops trading the ETF and liquidates it. Your previously invested capital is then returned to your brokerage account.

The Right Fund Volume

Experts assume that a fund volume of at least 100 million euros makes an ETF profitable for providers. From this point, an ETF is also relatively safe from liquidation.

As a rule of thumb, the larger the fund volume, the more established, liquid, and secure the ETF is. For niche ETFs, the fund volume may be smaller, but the management costs are usually slightly higher.

Reference

Warum das ETF Fondsvolumen entscheidend ist

Costs and Fees with ETFs

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

When selecting ETFs, the Total Expense Ratio (TER) is an important decision-making criterion. You can find it in the factsheet.
The TER summarizes all management costs charged by your ETF provider. The provider deducts these costs annually from the fund volume.
It’s best to trade during the official exchange hours of the reference exchanges, otherwise, you may pay more for securities due to a higher spread.
Transaction costs arise when buying and selling. They consist of custody fees and exchange fees.

Overview of the main costs:

Cost Type	Description	Cost Center
Transaction Costs	Purchase and sale fees / Custody fees	Custodian Bank
Total Expense Ratio (TER)	Includes management fees, marketing budget, index licensing fees	ETF Provider
Spread & Exchange Fees	Difference between buy and sell price	Exchange

Transaction Costs and Custody Fees

Depending on the broker you use to buy and store your ETFs, additional transaction costs and custody fees may apply.

For each transaction, i.e., when buying or selling securities, brokers may charge an order fee. This fee is set by the broker themselves.
Some newer providers, such as Neo-brokers and Smart brokers, often offer very low fees, free savings plans, and free custody accounts.

Therefore, it is important to compare different brokers before making a decision!

Total Expense Ratio (TER)

The Total Expense Ratio (TER) is the overall cost ratio. The ongoing costs of an ETF include

licensing fees
marketing fees
administrative costs

For example, the iShares Core MSCI World ETF has a TER of 0.2%. If you invest €10,000 in this ETF, your annual total cost would be €20.

The ETF provider deducts the fees from the fund itself. Therefore, the TER is not deducted directly from your account; instead, the fund volume decreases. In other words, you pay with a slightly lower fund performance.

Since 2004, ETF providers are legally required to disclose the TER. You can find it in the fund prospectus, on the provider’s website, or in the ETF’s factsheet—anywhere the ETF is listed.

The Spread Between Bid and Ask

In stock trading, there are always two prices: the buy price and the sell price.

The demand side wants to buy the stock and offers a certain amount of money, known as the bid price.
The stock owners make an offer. The lowest price on the offer side is called the ask price.

The difference between these two prices is the spread, also known as the bid-ask spread. For the buyer, it is beneficial if both prices are as close to each other as possible.

Outside of the regular trading hours of major exchanges like Xetra, less trading occurs. Some marketplaces take advantage of this by offering longer trading hours. During this time, the spread is usually wider. The spread when trading outside of regular market hours can make a significant difference!

When trading outside regular hours, the spread often increases because there is less liquidity, meaning fewer buyers and sellers. As a result, the difference between the bid and ask price widens, which can increase the cost of executing a trade.
Example: Left: normal trading day; Right: weekend

The Right Time to Trade

Traditional financial institutions typically trade on major national exchanges, such as those in Frankfurt or Stuttgart.

Xetra, the trading platform of Deutsche Börse AG, is the leading venue for trading stocks and ETFs. Here, a large volume of stocks change hands daily, and due to the high trading volume, the spreads are relatively low.

Recently, so-called neo-brokers have started to disrupt the market. These neo-brokers include platforms like Trade Republic, Scalable Capital, and Smartbroker.

For example, Trade Republic executes its trades through the electronic trading system of the Hamburg Stock Exchange, LS Exchange. Through this, you can trade from 7:30 AM to 11:00 PM.
However, the reference exchange, Xetra, is only open from 9:00 AM to 5:30 PM. During Xetra’s hours of operation, the spreads on LS Exchange are aligned with those on Xetra. When Xetra is closed, the spreads on LS Exchange may widen, meaning you will pay more than necessary!

Savings Plans Avoid Unnecessary Costs

ETF savings plans are unaffected by the off-exchange spread risk. They are always executed during the official trading hours of the reference exchanges.

Are ETFs Cheaper Than Individual Stocks?

Depending on whether you’re following a stock or ETF strategy, different costs apply.

Individual Stocks	ETFs
Transaction Costs	Relatively high
Management Costs (TER)	None
Spread & Exchange Fees	Depends on the exchange

If you buy many stocks yourself, you’ll incur higher transaction fees. However, with an ETF savings plan, these fees can be completely avoided.
Individual stocks don’t have ongoing management costs like the TER (Total Expense Ratio) of ETFs.

If you want to diversify globally, ETFs are the way to go: buying thousands of individual stocks would be expensive and time-consuming.

Reference

Welche Kosten und Gebühren gibt es bei ETFs?

Distributing or Accumulating ETFs?

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The stocks contained in ETFs pay dividends, which you, as an investor, benefit from.
Distributing ETFs pay out the dividends to your account.
Accumulating ETFs reinvest the dividends, meaning they buy more shares.
For passive income, distributing ETFs are suitable. If you want to build wealth, accumulating ETFs are more beneficial.
For most indices, ETFs are available in both variants.

What happens to dividends in ETFs?

Companies can share their profits with shareholders by distributing dividends. Shareholders receive a certain amount of money based on the number of shares they own.

An ETF consists of thousands of individual stocks. When a company pays dividends to an ETF, these dividends belong to the ETF investors. An ETF can handle these earnings in two ways:

Distributing ETFs: The ETF pays out the dividends to its investors. Depending on the ETF, investors receive payments annually, quarterly, or even monthly.
Accumulating ETFs: The ETF reinvests the dividends by purchasing more shares. This increases the fund’s total assets (fund volume). This process is known as accumulation (thesaurierung).

Distributing ETFs: Dividends Paid to Your Account

Distributing ETFs regularly pay out their earnings directly to your settlement account. -> You have full control over how to use this money—you can either reinvest it or spend it elsewhere. If you choose to reinvest the dividends, transaction costs may apply.

For investors using German brokers, taxes on earnings from distributing ETFs are automatically deducted, making the process convenient. However, if your broker is based abroad, you must report these distributions in your tax return.

Because of their regular payouts, distributing ETFs are ideal for generating passive income.

You can treat these payments like a salary from employment.
They are especially popular among older investors, who often use them as a form of retirement income.

Accumulating ETFs: Dividends Are Reinvested

The key advantage of accumulating ETFs is that you, as an investor, benefit from the compound interest effect.

Earnings, such as interest and dividends, are automatically reinvested into the ETF.
As the ETF’s value grows, so does the value of your ETF shares. This means you also earn returns on the reinvested dividends, allowing your money to work for you and generate long-term returns.
The longer your money remains in a profitable accumulating ETF, the greater the compound growth effect.

Since you do not receive cash payouts from accumulating ETFs, you do not immediately realize taxable gains. The overall tax burden during the accumulation phase remains significantly lower compared to distributing ETFs, as taxation is initially minimized.

A Simplified example (with considering tax) to compare distributing and accumulating ETF:

	Distributing ETF	Accumulating ETF
ETF Price	€100	€100
Dividend Received	€5	€5
Paid to Your Account	€5	€0 (Reinvested)
New ETF Price	€100	€105
Total Wealth	€105 (€100 ETF + €5 cash)	€105 (all in ETF)

Which is better?

If you want to build wealth, an accumulating ETF is the better choice. Over the years, you benefit from compound interest, which can significantly boost your returns. Additionally, you save on transaction costs that might occur if you manually reinvest dividends.
If you want passive income, a distributing ETF is more suitable. You receive regular cash flow, but to generate enough income to live on, you need to invest a large amount.
- With a distributing ETF, you can also make better use of the €1,000 annual tax-free allowance, as you receive dividends directly.

Accumulating vs. Distributing ETFs

	Accumulating	Distributing
Use of earnings	Earnings are automatically reinvested in the ETF	Earnings are paid out; some providers offer automatic reinvestment
Compound interest	Yes	Optional (only with reinvestment)
Taxation	Advance lump sum plus capital gains tax upon sale	Tax allowance on earnings is considered by the broker; capital gains tax on each distribution as well as upon sale

Reference

Ausschüttende oder thesaurierende ETFs?

Replication Method of ETFs

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

To replicate an index, there are 3 different methods:

Physical replication buys the index in the same weighting. Such replication is called fully replicating ETFs.
With sampling, the ETF provider only buys a selection of the securities. They exclude those with a very small share in the index.
Swap ETFs providers enter into a swap agreement with a financial institution. Swap ETFs are mainly used in niche ETFs.

ETFs aim to replicate the performance of an index as accurately as possible. There are different ways to achieve this goal. The method by which an ETF bundles and represents price movements is called the replication method. You can read about the replication method of an ETF in its factsheet.

An index can be replicated by an ETF in three different ways. The deciding factors are how accessible the securities are and how expensive they are. If a stock is on a market that is difficult to access from abroad, ETF providers need to be creative. ETF providers choose between

physical replication
optimized sampling
synthetic replication

Physical Replication

Physically replicating ETFs track the index by purchasing all the securities included in it. Because these ETFs mirror the index exactly, they are referred to as fully replicating or full-replication ETFs.

Example: If an ETF aims to physically replicate the DAX, it buys all 40 stocks included in the index. The weighting of each stock in the index determines its proportion within the ETF. If a company drops out of the DAX and another one is added, the ETF sells the outgoing stock and buys shares of the newly included company. The same applies when there is a rebalancing within the DAX.

Each transaction incurs fees, which affect the Total Expense Ratio (TER) of the fund. These fees are deducted from the fund’s assets and impact its performance.

In niche markets and for hard-to-replicate securities, costs are often higher than for Dow Jones stocks or those from similarly established indices.
The DAX, with its 40 components, is relatively manageable, keeping costs low.
However, global ETFs containing hundreds or even thousands of securities face higher costs, making physical replication more suitable for smaller indices.

Sampling

Sampling is an advanced form of physical replication.

The ETF still purchases securities physically, but only a representative subset. With this “sample,” the provider makes a preselection, which is why this approach is also called optimized sampling or optimized physical replication.
Instead of including all the securities in the index, the ETF invests only in the most significant ones.
- A security is considered important if it has a high weighting in the index.
- Illiquid securities or those with a very small share of the index are disregarded.
Example: in the MSCI Emerging Markets Index, many stocks have a weighting of just 0.01%. This index includes stocks from countries with less liquid and accessible markets compared to Europe or the US. An ETF using the sampling method ignores these minor components since they have minimal impact on overall index performance. This approach helps ETF providers reduce transaction costs.

Synthetic Replication

Some markets are difficult to access due to low liquidity or regulatory restrictions. This includes asset classes such as commodities or money market interest rates. However, investors still want to gain exposure to these indices through an ETF. In such cases, an ETF can replicate an index using a swap agreement.

The ETF provider enters into a swap deal with a counterparty, usually a major financial institution. The counterparty holds the desired assets, while the ETF itself maintains an independent collateral portfolio.
The two parties sign a contract: the ETF provider delivers the return of the collateral portfolio to the counterparty and, in exchange, receives the return of the target index.

Example

Let’s say you invest in a synthetic MSCI China ETF, but the ETF does not directly purchase Chinese stocks. Instead, the process works as follows:

This ETF might hold European corporate bonds as its collateral portfolio.

The ETF provider signs a swap agreement with a bank (e.g., Deutsche Bank), which agrees to provide the returns of the MSCI China Index. In return, the ETF provider gives the bank the returns generated by the collateral portfolio (the European bonds).

As a result, the price of your ETF moves in line with the MSCI China Index, even though the ETF itself does not own any Chinese stocks.

The value difference between the two portfolios must not exceed 10% under EU regulations.

If the swap portfolio is at €100 and the collateral portfolio is at €110, the swap must be executed at this point at the latest. The same applies if the swap portfolio is at €100 and the collateral portfolio drops to €90.
Most ETF providers execute swaps well before reaching the 10% threshold.
With swap-based ETFs, there is always counterparty risk, meaning the possibility that the financial institution involved in the swap could go bankrupt. However, both parties provide collateral, which is usually more valuable than the swap transaction itself, reducing the overall risk.

Comparison of Replication Methods

Replication Method	Description	Typical Distribution Type	Application Examples
Physical Full Replication	The index is replicated with all its constituent securities in the same proportions.	Distributing or accumulating	Small indices with a high proportion of blue-chip stocks: DAX, Euro Stoxx 50, Dow Jones 30
Optimized Sampling (Physical)	The ETF replicates the index with a selection of the most important index securities.	Distributing or accumulating	Larger number of blue-chip stocks: MSCI World, MSCI Emerging Markets
Synthetic (Swap ETFs)	The index is replicated through swap agreements.	Primarily accumulating	Niche markets and specialty ETFs: FTSE Vietnam, MSCI Emerging Markets, Leverage or Short ETFs

Which replication method is the best?

The replication methods have little impact on ETF performance. The replication method also doesn’t make a difference in terms of taxes.
Physically replicating ETFs are a good choice because they replicate indices so accurately.
If you want to invest in niche markets, you often can’t avoid swap ETFs.

Good to know: ETFs and the associated underlying portfolios are considered special assets in Germany. However, the outstanding swap difference is not. If the counterparty goes bankrupt, the ETF could, in the worst case, lose the outstanding swap return. Although the likelihood is low, you should check what collateral the respective ETF has deposited.

Reference

ETF Replikationsmethoden im Vergleich

Tracking Difference & Tracking Difference

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The Tracking Difference refers to the difference in performance between an ETF and its benchmark index over a given period. It is influenced by factors such as transaction costs from rebalancing, taxes, or cash holdings.
You can use the Tracking Difference to assess the quality of an ETF’s index replication.
The Tracking Difference usually needs to be calculated by yourself. The necessary performance data can be found in the factsheet.
The Tracking Error refers to the annual deviation of the daily returns of the ETF and the benchmark index. It indicates how much the Tracking Difference fluctuates.

An important quality feature for ETFs is the so-called Tracking Difference, the performance difference between the ETF and its benchmark index. In combination with the Total Expense Ratio (TER), you can determine if poor index replication is causing you to miss out on potential returns.

Tracking Difference in ETFs

What is tracking difference?

ETFs aim to replicate an index as accurately as possible. However, this is never perfectly achievable for several reasons. Therefore, the value progression of the ETF will always differ slightly from that of the index. 🤪

The Tracking Difference shows the difference between the performance of the ETF and that of the benchmark index. The causes for this can include

fees
the handling of foreign withholding taxes
income from securities lending

Sometimes, ETFs even outperform the benchmark index.

Where does the Tracking Difference come from?

ETF providers generally try to keep the tracking difference as low as possible, as investors compare it with other ETFs and choose the one with the better value. The following factors can influence the tracking difference:

TER (Total Expense Ratio)

The total expense ratio reduces the returns of an ETF. The lower it is, the smaller the impact on the fund’s performance.

(Source) Taxes

Differences between the calculated and actual taxes can lead to discrepancies in the ETF.

Replication

Depending on how an ETF replicates an index, different costs may arise. With physical replication, many securities may need to be bought, leading to high transaction costs.

Cash Drag

Cash holdings from dividend payouts cause delays, leading to deviations.

Timing

Rebalancing the ETF due to changes in the benchmark index can contribute to the difference.

Securities Lending

By lending securities, ETF providers can generate additional income, allowing them to (temporarily) outperform the benchmark index.

Tracking Difference and TER

To illustrate the costs of an ETF,

the Total Expense Ratio (TER) is usually the first metric considered.

It indicates how much an ETF costs per year.
However, the TER alone is only partially meaningful when assessing opportunity costs—missed profit opportunities.

The tracking difference, which is also a useful metric for evaluating an ETF’s quality, reflects this “missed return” by comparing the ETF’s performance to that of the index

If the tracking difference in the past was significantly higher than the TER, opportunity costs were incurred, meaning potential gains were lost.
However, these figures are based on past performance and cannot be directly projected into the future.

When determining actual costs, the TER still remains the most reliable metric. You can compare the tracking difference with the TER to get a clearer picture.

Finding the Tracking Difference

Find in the factsheet
Browse through ETF platforms

⚠️ These figures should be taken with caution, as they are based on independent calculations rather than official data from the fund provider. As a result, the calculations may be inaccurate.

Calculating the Tracking Difference

Here, we take the iShares Core MSCI World ETF with ISIN IE00B4L5Y983 as an example. The TER (Total Expense Ratio) for this ETF is 0.2%.

Formula for calculating the tracking difference:

$$ \text{Tracking Difference (TD)} = \text{Fund return} - \text{Index return} $$

$\text{TD} > 0$: The ETF has outperformed the index.
$\text{TD} < 0$: The ETF has underformed the index.

We compute the tracking difference for the past year:

$$ \text{TD} = 10.42\% - 10.41\% = 0.01\% $$

$\text{TD} = 0.1\% > 0$ indicates that the ETF has outperformed its benchmark index. In this case, the ETF has performed better than expected, making it more cost-effective for investors.

Tracking Error

The Tracking Error, also known as the replication error, is a related metric. It is often mistakenly used interchangeably with the Tracking Difference.

The Tracking Error measures how much the Tracking Difference fluctuates over time.
A lower Tracking Error means the ETF replicates its benchmark index more accurately.
A higher Tracking Error indicates that the ETF tracks the index less reliably, sometimes performing better and sometimes worse than the benchmark index.

Tracking difference vs. tracking error

The Tracking Difference refers to the actual performance difference between an ETF and its benchmark index over a given period.
The Tracking Error, on the other hand, measures the variability of these performance differences over time, indicating how the Tracking Difference has fluctuated.

Reference

Tracking Error & Tracking Differenz erklärt

Currency Risk

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

Anyone investing globally automatically invests in countries and companies with currencies other than the euro.
Currency pairs like EUR/USD can fluctuate, representing both a currency risk and an opportunity.
By diversifying globally and investing for the long term, investors balance out currency risks and opportunities, making it unnecessary to hedge against such fluctuations.
The fund currency of an ETF is purely cosmetic and does not represent either a risk or an opportunity—it is irrelevant.

What Role Does Currency Play in ETFs?

When you invest in companies outside the Eurozone through an ETF, you introduce various currencies into your portfolio—this comes with currency risk.

The fund currency, meaning the currency in which an ETF is listed, does not matter. A US dollar-denominated ETF carries the same currency risk as its euro-denominated counterpart if they track the same index.

World ETFs bring many different currencies into your portfolio

The major advantage of world ETFs is broad diversification: You automatically invest in different countries, continents, and therefore, various currencies. For example, the MSCI World includes companies like Apple (USD) and Nestlé (CHF), along with many other currencies.

This introduces both currency risk and currency opportunity into your portfolio.

Currency risk can slightly reduce your returns if exchange rates move unfavorably, and depending on your investment amount, it may have an impact. However, this risk shouldn’t keep you up at night.

As an investor, it’s essential to understand the role of different currencies in your investments. All securities within an ETF have a “home currency,” but companies are exposed to currency fluctuations as soon as they operate internationally. For example, Apple sells its products worldwide and generates revenue in multiple currencies. The same applies to other companies like Samsung or Nestlé. Globally operating companies can hedge against such currency risks.

Indirect Hedging Against Currency Risk

If you invest in the MSCI World, you have a portfolio with exposure to multiple currencies and a certain dependence on the US dollar. However, upon closer examination, many individual securities within the index are already highly diversified in terms of currency.

Currency Risk Is Also an Opportunity

What exactly is meant by currency risk? Whenever you invest in securities outside the Eurozone, you take on this risk. It refers to the possibility that your home currency—such as the euro in Germany and Austria—appreciates against the currency of your investment.

Example

Let’s say you own 100 shares of an ETF that tracks the U.S. Standard & Poor’s Index, such as the Vanguard S&P 500 UCITS ETF. If the U.S. dollar weakens against the euro, the value of each of your 100 shares decreases. If you were to sell at that point, you would incur a loss due to the unfavorable exchange rate movement.

However, the opposite scenario is also possible: If the U.S. dollar strengthens against the euro, your shares become more valuable in euro terms.

Fund Currency of an ETF

The fund currency of an ETF refers to the currency in which the fund’s assets are managed by the ETF provider. This is typically the same currency used in the index that the ETF tracks. You can usually recognize this in the ETF’s name or, at the latest, in the ETF’s factsheet.

However, for you as an investor, this is not relevant. Your broker settles in your home currency, which in Germany is the euro. The fund currency is essentially a marketing tool to suggest more security and does not protect you from currency risk 🤪.

Example

To convert the returns of a US-dollar-denominated ETF to euro, the rough calculation goes like this: US dollar return minus 2% = euro return. So, if a U.S. index rises by 5%, your German ETF would only show a 3% return, but in the end, the same amount of money will be received.

Different exchanges trade in different currencies, and the trading currency is indicated by the exchange. For example, on Xetra (Frankfurt) and Paris, the trading currency is always the euro, regardless of the fund currency. However, at the Zurich Exchange, trading occurs in Swiss francs.

Important: Don’t let this confuse you. It doesn’t matter whether you buy an MSCI World ETF in U.S. dollars or euros. It is essentially the SAME product. This is because your depositary bank will convert everything to euros anyway. The fund currency is not relevant to you as an investor.

Exchange Rates are Mathematically a Zero-sum Game

Overall, exchange rates have an expected return of 0% mathematically. This means that, in the long term, no profit is expected from exchange rates. The chance of losing money due to exchange rates is as high as the chance of making money.

How to Manage Exchange Rate Risk with Global ETFs

With ETFs, you have good opportunities to keep currency risk low. You can proceed as follows:

Split your assets across different asset classes and markets with different currencies.
Invest long-term: Over a longer period, currency fluctuations usually balance out.
Optionally: Increase the proportion of European companies in your portfolio. You can achieve this by adding an ETF on the MSCI Europe or Euro Stoxx 600.

In Most Cases Unnecessary: Currency Hedging with Hedged ETFs

If you want to hedge against exchange rate risk, you can use “hedged ETFs,” which protect your assets with other financial derivatives. However, these come with additional fees that can reduce your overall returns.

Hedged ETFs can only eliminate currency risk in the short term, not in the long term. If you’re planning to invest for the long term, we recommend against them. As mentioned, hedged ETFs reduce your returns and are only sensible for short-term speculation, if at all.

Reference

Währungsrisiken bei ETFs

Fund Domicile

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The fund domicile of an ETF can usually be identified by the International Securities Identification Number (ISIN). A country code at the beginning of the ISIN marks the domicile, such as “IE” for Ireland or “LU” for Luxembourg.
ETFs that include UCITS in their name are launched within the EU and are subject to EU regulations. These funds adhere to a uniform standard.
Within the EU, the significance of the fund domicile has somewhat decreased. Many of the ETFs offered in Germany are also domiciled in Germany.
Luxembourg and Ireland play a special role here. Luxembourg’s status is attributed to its strong infrastructure, transparent financial legislation, and its history as a hub for funds. Ireland, on the other hand, offers tax advantages when holding physical stock shares from the USA.
Overall, tax benefits due to the fund domicile are not primary criteria when selecting an ETF, while European origin is more important. For exotic funds, the German tax data is often not maintained, leading to higher tax burdens for investors.

ETF Fund Domicile Explained

The place where an ETF is launched is called the fund domicile.

Many ETFs already include a hint about their place of origin in their name.
- The addition of “UCITS” means that the fund was launched and is operated according to EU regulations. This also implies that the fund is domiciled in an EU country. The national financial supervisory authority is responsible for overseeing the fund.
The fund domicile can also be identified by the ISIN, which is the 12-digit International Securities Identification Number.
- This can be found on every ETF’s factsheet.
- The first two characters are an abbreviation representing the fund domicile. For example, “DE” stands for Germany and “LU” stands for Luxembourg.

Common Fund Domicile: Luxembourg and Ireland

It is noticeable that certain countries appear frequently when scrolling through the lists of available ETFs. One of them is

Luxembourg

Luxembourg has earned its good reputation as the home of many funds over several decades
Arne Scheehl from Lyxor ETF also emphasizes the importance of institutional investors who are familiar with the regulations in Luxembourg and, therefore, save a lot of work by investing there.

Ireland

Mainly due to tax reasons: This is especially true for physically held U.S. stocks, and it is related to the double taxation agreement with the United States. This agreement provides slight tax advantages for funds, which can be passed on to investors, giving them a competitive edge.

Fund Domicile as a Decision Criterion

The fund domicile can be considered as one of several quality criteria

In particular, UCITS funds established in Europe offer the benefits of a unified European regulatory framework.
Non-European ETFs are rarely offered by online brokers, which is due to European regulations. However, caution is required: Some of these “exotic” funds are listed on exchanges in the less-regulated over-the-counter (OTC) market.

When it comes to quality features, factors such as cost (TER), fund size, or additional data like tracking difference may be more decisive.

Reference

Fondsdomizil bei ETFs

How to Read ETF Factsheet

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

All information about an ETF can be checked in the corresponding factsheet.
Each ETF carries a unique twelve-digit ISIN (International Securities Identification Number).
Every security in Germany also carries a six-digit WKN (Securities Identification Number).
In the factsheet, you can find the most important product information, such as: distribution type and frequency, replication method, costs (TER), and the ETF provider.

There are some mandatory documents that you can find on the profile page of each ETF. However, the factsheet typically provides investors with the best overview. On 1-2 pages, you will learn, among other things, how the ETF is composed, what costs are involved, and more about the characteristics of the ETF.

ETF Name

Each ETF has a unique name for distinction. The naming typically looks like this—before even looking at the factsheet, you can derive the following information: the ETF provider, the index the ETF tracks, the legal structure, and other characteristics (e.g., the replication method or distribution type).

Example:

Trackers: ETF issuer (ETF provider)
MSCI Emerging Market: The index this ETF is designed to track
UCITS: Undertakings for Collective Investment in Transferable Securities, an EU regulatory framework ensuring that the fund meets certain standards of investor protection, making it available for sale across Europe
1C
- 1: typically indicates the currency denomination (e.g., USD or EUR)
- C typically indicates that the ETF is a Accumulating (Accumulation) fund, meaning that any income or dividends earned by the fund are reinvested rather than paid out to investors.

WKN and ISIN

Each security in Germany carries a WKN (Wertpapierkennnummer) or security identification number. This is a six-character combination of numbers and letters that uniquely identifies the security.

The ISIN (International Securities Identification Number) has 12 characters and is used internationally.

National identification numbers like the WKN can usually be converted into an ISIN.
An example of an ISIN is DE 000N252882. The “DE” is the country code, followed by the NSIN (National Securities Identifying Number).

Factsheet: The Most Important Information at a Glance

Let’s take a look at an example ETF factsheet: the iShares Core MSCI World UCITS ETF by BlackRock. Typically highlighted in color, the first page of the factsheet contains the key details of the ETF—the most important information you need to know:

Asset class (Anlageklasse): in this case, equities (as the MSCI World in the name indicates that the MSCI World Index is being tracked)
- With ETFs, you can track different asset classes, such as: equities, bonds, real estate, and commodities.
Share classes (Anteilsklasse): Funds can have different share classes. These are shares in the same fund.
- In this example, both the investment and share class are denominated in US dollars, so no currency conversion fee arises.
- Although different share classes have the same value in an ETF, they may differ in aspects such as profit distribution or the currency used.
Fund’s Inception date (Auflegungsdatum des Fonds): shows when the ETF was launched
- In this example, it has been available since September 25, 2009
- This is important information because with younger ETFs, you should pay close attention to the assets held and the number of shares issued.
- Generally, the risk of the ETF provider going bankrupt is lower with more established funds.
Benchmark index (Vergleichsindex): indicates which index the ETF tracks. In this case, the MSCI world
Total Expense Ratio (TER): The most important metric for the costs of an ETF. It indicates all the costs that the ETF provider deducts from the fund’s assets to replicate the index.
Methodology (Methodik): Indicates the replication method the ETF uses to track the index In this case, optimized sampling.
Rebalancing interval (Rebalancing-Intervall): Indicates how often the ETF provider adjusts the composition of the ETF to match the index
- In this example, the provider rebalances the composition four times a year, as needed, to ensure the ETF closely tracks the index.
Distribution method (Gewinnverwendung): An important criterion when selecting ETFs that align with your strategy.
- In this example, “Accumulating” (thesaurierend) means that the ETF directly reinvests the dividend earnings.

A little further down in the factsheet, you’ll find an overview of the performance, i.e., the ETF’s historical returns.

The first table shows the annual return for the years 2015 to 2019 and compares it with the return of the benchmark index that the ETF tracks (MSCI World in this case).
The second table, which shows the annualized performance, is more relevant for long-term investments
- Here, you can see how much return you would have made each year if you had bought and held the ETF for X years.
- it compares the performance with the return of the benchmark index. You will see that the deviations are consistently below or exactly at 0.11% (tracking difference).

The performance is NOT an indicator of the future performance of the ETF. However, it provides you with a useful reference.

What values are included in my ETF?

Before investing money in an ETF, it is always advisable to check which specific assets it consists of. You can find this information in the factsheet as well.

Example

In our example ETF, which tracks the MSCI World, there are more than 1,600 individual companies included, spread across many countries and sectors. In the factsheet, you will find an overview of the sectors and regions in which your ETF is invested.

Breakdown by sectors

Breakdown by regions

You can see that the MSCI World UCITS ETF from BlackRock has a strong focus on the USA, followed by Japan, and then European countries. In terms of sectors, IT is the largest weight in the example ETF. Health care, financials, and cyclical consumer goods (i.e., things that aren’t essential for survival) are also at the top.

Reference

Wie liest man ein ETF Factsheet?

ETF Trading

Fri, 07 Mar 2025 00:00:00 +0000

Brokerage Account

Fri, 07 Mar 2025 00:00:00 +0000

Why an ETF Investor Needs a Securities Account

A securities account, or simply a “Depot” (in German), is an account used to store securities. “Depot” comes from French and means storage.

In your securities account, you can store ETFs, index funds, stocks, bonds, or derivatives.
Nowadays, you can open a securities account not only with traditional banks but also with online brokers or neobrokers to trade financial products.

Difference between a bank and a broker:

Banks have a banking license.
Brokers cannot maintain accounts themselves. Therefore, you always receive your securities account in combination with a settlement account from the partner bank of the provider.

In both cases, your money is secured, even in the event of insolvency.

Brokers issue securities accounts.

In Germany, brokers must be approved by the financial authority.
They are the interface between you as an investor and the financial market, enabling you to access financial products. Only with a securities account can you trade ETFs.

Nowadays, most securities accounts are online. Even though the institutions now use digital systems, your securities are secure: The provider manages your securities in a fiduciary capacity. Even if the broker goes bankrupt, you will still receive your shares.

Each securities account has a reference account, from which the amounts you want to use for securities trading are debited or deposited.

You can transfer profits to your linked checking or settlement account.
Earnings from ETFs, dividends, etc., will be paid out by the broker to your reference account.
For each of these transactions, you will find a receipt in your broker’s overview with the exact price at the time of buying or selling the security.

You can easily execute and adjust ETF savings plans or one-time investments, or sell shares via your broker’s website or app.

Costs You Will Incur

Although the fees for trading ETFs have generally decreased, you can save a lot of money by carefully comparing brokers. There are significant differences between providers.

Here is an overview of the cost models:

Account maintenance fees

There are account maintenance fees – this is either a fixed amount charged monthly or annually, or a specific percentage of the account balance, which can become expensive for large accounts.

Many accounts are even free: either for the first few months or permanently. Others have conditions that you must meet to keep them free, such as maintaining a Comdirect checking account or having an active savings plan.

Transaction Ccsts / Oder fees

Transaction costs are charged per order. These can vary significantly, so you should definitely compare providers to find the best solution for your investment strategy.

Some providers charge a certain percentage per order, such as 0.2%. For one-time ETF investments with larger amounts, fees can add up quickly! -> In this case, a provider with flat fees per order might be more suitable.
Hybrid model: you pay a small amount per order plus a percentage of the fee

Trading Venue

In addition to order fees, some brokers charge a trading venue fee, which depends on where the trade is executed.

The cheapest options are electronic trading platforms like Gettex, Tradegate, or Quotrix.
Traditional stock exchanges, such as those in Frankfurt or Stuttgart, tend to have higher fees.
The largest electronic trading venue in Germany is Xetra, handling around 90% of stock trading, but it has relatively high fees. Trading on foreign exchanges usually incurs even higher fees.

Savings plan fees

If you regularly invest in an ETF or stock through a savings plan, pay attention to the associated costs. Many neo-brokers offer free savings plans.

###Spread

The spread is the difference between the buying and selling price of a security.

Markets with high trading volumes generally have lower spreads.

Xetra is the leading exchange for German stocks, and while it has higher order fees, it may be worthwhile for large trades due to its lower spreads.

Spreads are generally lowest when the main exchange is open. -> So it’s best to trade between Monday and Friday, 9:00 AM – 5:30 PM. Trading outside these hours results in higher spreads, increasing your costs.

Additional Services

Some services, such as registering for shareholder meetings or being listed in the shareholder register, often come with extra fees.

How to Find the Right Securities Account

Question you should specifically consider when selected a securities account:

What type of securities are you trading?

Some accounts are better suited for ETF investors than others because they offer a broader selection of ETFs. Many brokers focused on individual stocks only offer ETFs from specific providers, which limits your choices.

How will you invest in ETFs: as a lump sum or via a savings plan?

How high is your savings rate in the latter case? Depending on this, different providers might be more suitable for you.

Because their fees vary and
Because some providers offer free savings plans or allow you to start with small savings rates from around €25.

Which ETFs do you want to invest in?

ESG, niche ETFs, and even different replication methods may not be available with all providers. Therefore, it’s worth establishing a clear strategy beforehand to ensure that your broker offers the ETFs you want.

Do you prefer trading on your smartphone or desktop?

New neo-brokers sometimes only offer apps. Some people find this very practical, while others prefer having an overview on their desktop. It’s a matter of personal preference. For those who find both too modern, it’s still possible to go to a bank branch.

Joint or individual account?

We recommend using separate accounts for couples, as this could have tax advantages. Learn more in our guide on taxes and ETFs.

If your priorities change or you want to switch to a new strategy, you can always switch your broker. Most providers will transfer your ETFs for free and easily.

Criteria for a good securities account

Manage the account yourself?

If you want to make your own investment decisions, online brokers are the right choice.
If you’re unsure, you can also open an account through a bank advisor. However, this usually comes with higher fees, and the advisor will tend to recommend more expensive, actively managed funds.

Which securities? How often?

If you already know which ETFs or ETF savings plans you want to invest in, you can double-check with your chosen broker to ensure they offer the ETF. For long-term wealth building, savings plans are particularly interesting for you.

What costs are involved?

In addition to the order fees you pay with each purchase and sale, some brokers also charge account maintenance fees. Make sure to check the provider’s website so you don’t get any unpleasant surprises! All the information can be found in the “Price and Service Directory.”

Nowadays, many online providers offer accounts with no maintenance fees. The strong competition among numerous providers has made high fees uncommon. However, there is still potential for savings.

Check out account comparison to get an overview of the fees for the most well-known German brokers.

Security

It occasionally happens that a financial institution goes bankrupt. However, as an investor, this should not be a cause for panic: The assets in ETFs are considered “special assets” in Germany.

The Capital Investment Code (KAGB) ensures that fund providers must manage their investors’ assets separately from their own.
In the event of the ETF provider’s bankruptcy, the insolvency administrator does not have access to your ETF assets. This is how the securities in your account are protected.
There is deposit protection for uninvested money in your linked cash account. This protects assets up to €100,000 per financial institution and per person.
- In other words, if you have more than €100,000 in a cash account, in the event of a bank insolvency, you are guaranteed to get €100,000 back.
- Depending on the insolvency situation and additional protective mechanisms, higher amounts may also be refunded.

Overview of the protection of securities and bank deposits:

	Insolvency ETF Provider	Insolvency Bank
Protection	ETF assets are special assets	Protection for (cash) deposits like savings, fixed deposits, and checking accounts: Up to €100,000 through deposit insurance Additionally, voluntarily a member of private deposit protection funds Protection for securities such as ETFs: Special assets; do not belong to the bank
Consequence in the event of insolvency	Liquidation of the ETF and cash payout to investors	Transfer and transfer of securities to a new broker Reimbursement of deposits by the German deposit insurance up to €100,000

Choosing a brokerage account is not the most important thing

You can’t go too wrong by choosing one of the German online or neo-brokers. Ultimately, it comes down to your usage preferences:

Do you prefer to trade via app or on the desktop?
Do you want personal advice and are willing to pay for it?

Also, switching brokers is generally quite simple. Brokers in Germany are required to offer you a transfer of your account and cover the costs.

This is not always the case with foreign providers – for example, DeGiro charges for transfers.

The transfer process is straightforward: You request an account transfer from your broker, sign the application, and wait a few days. This keeps you flexible – your choice of brokerage provider is not set in stone.

How to Get Your Securities Account

Open a securities account

Opening a securities account is easy and takes only 10-15 minutes: Choose the offer that best suits your needs and follow the instructions on the provider’s website.

The account opening is usually free; some providers offer bonus programs or other benefits.
Brokers are legally required to verify your identity. Most providers use video identification via webcam or smartphone for this.

Deposit money

Before you can buy ETFs, you need to deposit money into your reference account. Depending on the provider, you will receive the account details by mail and may have to wait a few days. Transfers can also take up to two days, depending on the financial institution. After that, you can use the money in your settlement account to purchase securities.

Answer securities trading questionnaire

Before placing your first orders, your broker will ask you if you have experience in trading securities. This is the so-called securities trading questionnaire, which providers in Germany are legally required to complete. You can select different asset classes. If you have no prior experience with ETFs, you will be asked for confirmation when executing your savings plan or lump sum investment.

Reference

Lump-Sum Investment in ETFs

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

As an ETF investor, you have the choice between
- a lump sum investment, where you invest a fixed amount all at once, and
- a savings plan, which is executed at regular intervals with an amount you determine.
You can also combine both methods.
Should you invest in ETFs as a lump sum or through a savings plan? That depends on your strategy and how much money you have already set aside.
As a buy-and-hold investor, you should only invest an amount that you can afford to do without for the next 10 years. This way, you benefit from long-term market development and avoid having to sell your ETFs under unfavorable conditions in the short term.
To make a lump sum investment in ETFs, you need to open a brokerage account and deposit money into it.
Profits from lump sum ETF investments are taxed the same way as profits from ETF savings plans.

Ways to Invest in ETFs

Lump sum investment: invest a fixed amount all at once
ETF savings plan: set up a direct debit to invest a chosen amount into your ETF portfolio every month
Lump sum + saving plan: e.g., invest €10,000 as a lump sum and continue investing monthly through a savings plan
Top up your ETF investment with one-time payments whenever you have extra money to invest

Ultimately, it depends on how much money you have available. Not everyone has enough savings from the start to make a lump sum investment. -> Savings plans are a great way to gradually build wealth while staying invested in the market.

Lump-Sum ETF Purchase

Before buying ETFs, you should understand how the funds work and establish an asset allocation, meaning you should consider how much risk you’re willing to take. Then, choose the indices that match your strategy and decide on an ETF.

Opening a Brokerage Account

Select Your ETF

Buy ETF

Use the search function of your broker to find the ETF you’ve chosen.

The easiest way to find it is by entering the international securities identification number (ISIN), which ensures that you’ve selected the correct ETF and not an alternative or similar one.
Before placing your order, you’ll see the current value of the ETF, the number of shares, and the purchase price. You can now choose a stock exchange.

Tip: Buy during the trading hours of reference exchanges like Xetra, not on the weekend. This can help you save on transaction costs.

Stay Calm

We recommend investing passively in ETFs. This saves time, reduces stress, and generally provides the best long-term return.

What You Should Consider When Making a Lump-Sum ETF Investment

Only invest in stock ETFs with money that you do NOT need for the next few years!

If you require the money for a major purchase, you might be forced to sell at an unfavorable time, potentially realizing temporary losses and losing money.

You can also combine a one-time investment with a savings plan.

Lump-Sum vs. in Tranches?

If you’re starting from scratch, a savings plan is a great option, allowing you to invest continuously with your chosen savings rate.

If you’ve already set money aside and are looking for the best strategy to invest in ETFs, you have two options:

a lump sum investment or
investing in tranches over a set period

Spreading out your investment over time introduces a form of temporal diversification.

The Statistics Favor a Lump-Sum Investment

From a purely statistical perspective, a lump sum investment is the better choice.

The reason is simple: the more money you invest in ETFs, the more your money can “work for you.”
The expected return on stocks is always greater than zero—statistically, it is seven times higher than that of a savings account.
- That means every day you wait to invest your money (whether you’re waiting for the next tranche or trying to time the market), you’re theoretically losing out on returns.

This holds true even if you don’t invest at the perfect time. Despite the idea of time diversification, delaying your investment means missing out on potential gains. Statistically speaking, ETF investments tend to grow positively over the long term, regardless of when you enter the market.

However, even though statistics paint a clear picture, you don’t have to take a purely rational approach. One aspect that should never be underestimated in investing is the emotional component.

If investing your savings as a lump sum into an ETF doesn’t feel right to you, a savings plan with tranches may be a better option.
Your investment should feel comfortable and not keep you up at night! Fear often leads to irrational decisions, which is something passive investors should always seek to avoid.

There is NO “Right” Time to Invest

One of the most common mistakes investors make is believing that they can achieve higher returns through market timing. In most cases, this is simply NOT true.

If you still prefer to split your investment into tranches instead of making a lump sum investment, it’s best to set a fixed schedule for your investments.

E.g., invest 10% of your capital every month or 20% every four months
This way, you avoid the temptation to time the market. -> A rule-based approach helps you keep emotions out of your investment decisions.

Many investors mistakenly believe that when stock prices rise for months, they must eventually fall soon. Conversely, they assume that during downturns—like the 2008 financial crisis—it’s best to wait before investing. -> This kind of thinking prevents many people from investing at all and costs them valuable time during which they could already be earning returns—regardless of when they entered the market 🤪.

ETF Investment: Lump-Sum vs. Saving Plan

Investment Type	ETF Lump Sum Investment	ETF Savings Plan
Timing	The timing of your investment matters: If you buy at favorable prices, you benefit more than with a savings plan, which invests gradually. Conversely, poor timing can lead to greater losses. However, this usually balances out over time.	ETF savings plans eliminate market timing. It’s a rule-based investment strategy that invests automatically, regardless of current prices or valuations.
Worst-Case Scenario	If you invest a large amount at a bad time, it may take longer to achieve positive returns. However, this is typically balanced out over time with broad diversification.	Your savings plan is executed automatically. You could increase contributions when prices are good or pause the plan when prices drop, but this would be counterproductive 🤔. A fixed savings amount allows you to buy more ETF shares at lower prices—otherwise, you’d miss out on market downturn opportunities.
Best Suited For	Large investment amounts, e.g., from an inheritance or when switching strategies/starting ETF investments with existing wealth.	Regular savings for long-term wealth accumulation, reducing risk through time diversification.

Reference

Einmalanlage von ETFs: Schritt für Schritt

Saving Plan

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The advantages of an ETF savings plan include reduced effort through the automation of saving and investing. Psychologically, an ETF savings plan also helps by lowering the barrier of having to motivate yourself to invest money each time. This allows you to build wealth in the background.
New offerings make it easy to set up and execute an ETF savings plan.
Settings such as the savings interval or dynamic adjustment of the savings rate allow for individual solutions that can be easily customized.
Steps to set up an ETF savings plan:
1. define your savings rate,
2. choose an ETF,
3. determine the savings interval and duration,
4. specify a reference account/set up a standing order.
The order of steps may vary depending on the broker.

Who is an ETF Savings Plan Suitable For?

The ETF savings plan is ideal for investors or savers whose goal is to build wealth over the long term.

The ETF savings plan also offers flexibility. You can sell your ETF holdings at any time or cancel the savings plan entirely, providing quick liquidity if needed.

How an ETF Savings Plan Works

With an ETF savings plan, shares of a specific ETF that you have chosen are purchased monthly (or at another frequency). The amount and frequency of the savings contribution are up to you.

How to Set a Saving Plan

Set Your Savings Rate

In the “Invest” section of your online broker’s platform, enter your desired savings rate—regardless of how frequently you plan to invest.

The higher your savings rate, the more your wealth can grow in the long term through the power of compound interest.
f you mainly want to invest passively via an ETF savings plan, you should carefully consider how much money you can spare to invest.
With the most affordable brokers, the minimum savings rate per ETF is usually €25—or even just €10.

Example

Find the ETF of Your Choice

Using your broker’s search tool or the product search on ETF providers’ websites

You can compare ETFs from different providers based on criteria like performance or cost.
You’ll also find the WKN or ISIN – the identification number of your ETF.

Don’t let the wide range of ETFs offered by various brokers overwhelm you!

Before setting up your ETF savings plan, you should have chosen a strategy that fits your risk profile.
With the WKN or ISIN, you can easily locate your ETF and add it to your savings plan. Each ETF also comes with a factsheet containing key information.

It’s important to note that not every ETF is eligible for a savings plan with every broker. If you plan to invest in a specific ETF through a savings plan, make sure in advance that your preferred broker actually offers this ETF in their savings plan program.

Determine the Interval and Duration of Your Savings Plan

Decide how often you want your specified savings rate to be invested from your account into the ETF – and how long the plan should run.

The classic interval is a monthly savings plan.

After receiving your salary, a portion is automatically deducted via standing order for the ETF savings plan.
Other intervals can also be practical, depending on your strategy.

If the minimum savings rate required by your preferred broker is higher than your desired savings rate, you can increase the savings interval—that is, extend the time between contributions.

Example

If the broker’s minimum savings rate is €50 and you want to invest around €30 per month, simply set the savings interval to quarterly instead of monthly and increase the contribution to €100.

The fee structure should also factor into your decision about the interval.

If there’s a fixed fee per savings plan execution, it makes more sense to have a larger savings rate—so in that case, increasing the interval is wise.
For percentage-based fees or free plan executions, it doesn’t make a difference whether you invest higher amounts less frequently or smaller amounts more often.

If you want, you can also limit the duration (validity period) of your savings plan. However, this isn’t necessary since ETF savings plans aren’t set in stone—you can change or cancel them at any time if your needs or preferences shift.

Dynamic Increase of the Savings Rate

With the dynamic increase feature, you can set your savings rate to automatically rise each year.

It allows you to adjust your savings rate in line with inflation, rising income, or growing financial goals. This is a useful function offered by some brokers, such as Scalable Capital, Consorsbank, or Flatex.
Even if your broker doesn’t offer this feature, you can still “dynamize” your savings rate manually by regularly adjusting it yourself.

Specify Reference Account and Set Up Standing Order

Indicate which account the savings amounts should be debited from. Now all you have to do is submit the savings plan and activate it using a TAN (Transaction Authentication Number).

Many brokers offer a convenient direct debit option, which means you don’t have to do anything else—just make sure your external reference account has enough funds when the deductions are made.
If your broker does not offer this feature, the easiest alternative is to set up a standing order to the reference account. This helps you stay disciplined with your investing habits.

At the very end, simply review and confirm the details of your ETF savings plan.

Reference

ETFs and Taxes - Tax Aspects of Investing

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

ETF earnings are subject to capital gains tax at a rate of 25%. In addition, there is a solidarity surcharge (5.5% on the tax) and possibly church tax.
Interest, dividends, and realized capital gains are taxed.
The capital gains tax is directly withheld by German custodial banks and remitted to the tax office.
The saver’s lump sum is your annual tax-free allowance and amounts to €1,000 or €2,000 for married couples per year. To directly apply this, a tax exemption order should be placed with the custodial account.
To align the taxation of distributing and accumulating ETFs, an advance lump sum may be applied. However, accumulating ETFs typically still provide a tax deferral effect.
For a joint custody account, gift tax may apply, so separate accounts are recommended.

Many investors are intimidated by dealing with the taxes due when it comes to ETFs and similar investments. However, the rules are relatively simple and should not discourage anyone from investing in ETFs, especially since they are automatically deducted by German custodial providers.

What taxes apply to ETF investments?

The taxes on ETF investments consist of three components:

capital gains tax (25%)
solidarity surcharge (5.5% of capital gain tax)
possibly church tax (8% or 9%)

Capital Gains Tax 25%

The capital gains tax, also known as the flat-rate withholding tax, is currently set at a flat 25% 🤪.

This rate does not change depending on the amount of taxable returns. It is a so-called withholding tax, meaning it is directly deducted at the source where the capital gains are generated, in this case, the depot or broker.
For investors, this is advantageous because they are guaranteed to pay this tax without needing to worry about filing a tax return.

Solidarity Surcharge (Soli) 5.5%

The often criticized solidarity surcharge still applies to investors. Since 2021, around 90% of wage and income taxpayers no longer pay the solidarity surcharge. However, it remains for higher earners and corporations. The rate of the solidarity surcharge is 5.5% of 25%, which amounts to 1.375%.

Possible Church Tax of 8% or 9%

Those who are subject to church tax, as they are members of a religious community that collects this tax through the state, must pay an additional 8% (in Bavaria and Baden-Württemberg) or 9% (in all other federal states) on the capital gains tax owed. It is possible to apply for a blocking notice with the Federal Central Tax Office to prevent the religion affiliation from being passed on to the relevant banks, and thus avoid the automatic deduction of church tax.

What exactly are the taxes applied to in ETFs?

The capital gains tax is applied flatly to these three types of capital returns:

Interest: For example, interest earned from a fixed deposit account.
Dividends/Distributions: Such as dividends from dividend-paying stocks.
Realized Capital Gains: For instance, through a stock whose selling price is higher than its purchase price.

How to Effectiverly Save Tax?

Exemption for capital investments

As with many other tax models, there is also an exemption for capital gains tax. This is called the Saver’s Allowance (Sparerpauschbetrag).

The Saver’s Allowance is €1,000 for individuals and €2,000 for married couples per year. It is possible to split this amount across different financial institutions. The principle of cash inflow applies here. Taxes on capital gains exceeding the Saver’s Allowance are due when they are generated.

In order for the Saver’s Allowance or part of it to be considered by your broker, you must submit a so-called tax exemption order (Freistellungsauftrag). In most cases, this can be done easily online. This ensures that earnings up to the amount of the tax exemption order are not taxed — taxes will only apply to amounts exceeding this limit.

A tax exemption order can be set up by the end of the year. If someone forgets to submit such an exemption order, they can still reclaim the taxes via a tax return to the tax office. However, this takes unnecessary time and is much more complicated than simply setting up the exemption order in advance.

Additional tax advantage: The partial exemption rate for ETFs

In addition to the Saver’s Allowance, a portion of the investment volume has been tax-exempt since the Investment Tax Reform of 2018 and 2019. The amount that is exempt is determined by the so-called partial exemption rate (Teilfreistellungsquote). This applies to both distribution gains and the preliminary flat-rate tax.

The amount of the partial exemption rate depends on the composition of the fund. For example, if the equity share exceeds 50%, as in many equity ETFs, 30% of the distributions are tax-exempt.

Fund Type	Composition	Partial Exemption Rate
Real Estate Funds	≥51% Real Estate	60%
Equity Funds	≥51% Equity Share	30%
Mixed Funds	≥25% Equity Share	15%
Mixed Funds	<25% Equity Share	0%

Note: the partial exemption rate does not apply to ETFs that synthetically replicate the capital market through swaps, known as fully funded swap ETFs. This is because the exemption only applies to actual capital investments in the market. However, fully funded swaps are relatively rare in the ETF market.

Low earners: Tax-free thanks to the non-assessment certificate

Since the capital gains tax is set at 25%, it may be higher than the personal marginal tax rate paid on income for certain groups such as students or low earners. To compensate for this, there is the option of obtaining a non-assessment certificate (also called NV certificate, Nichtveranlagungs-Bescheinigung). This can be applied for at the tax office. Those who have been issued such a certificate will have their earnings taxed at their personal marginal tax rate.

Preliminary Flat-rate and ETFs

Since the investment tax reform at the beginning of 2019, there has been a so-called preliminary flat rate (Vorabpauschale), which aims to restore the tax balance between accumulating and distributing funds or ETFs.

Previously, accumulating ETFs were highly advantageous because tax deductions were only made when the earnings were realized. -> This reduced the tax deferral effect, which occurs when tax payments are postponed until the gains are realized.
The preliminary flat rate seeks to balance this. It is limited by the fact that it only applies if it is lower than the capital appreciation of the fund for which it is calculated. This means that no preliminary flat rate is charged for ETFs without capital appreciation or even with losses.
The preliminary flat rate is the basis for the taxation of, especially, accumulating ETFs. It is calculated from the capital appreciation of the fund, a share of the Bundesbank base interest rate, and the respective partial exemption according to the type of fund.

It can be easily calculated with the preliminary flat rate calculator.

Which is Better for Taxes: Distributing or Accumulating?

For the preliminary flat rate, a fictional capital appreciation is assumed.

The Deutsche Bundesbank sets a base interest rate for this. During the low-interest phase, the base interest rate was negative, so no preliminary flat rate was applied.
E.g., for the year 2023, the base interest rate was 2.55%. If you made capital gains with your funds in the previous year, a preliminary flat rate will apply in 2024.

The preliminary flat rate is generally lower than the tax on distributions.

It is also possible that a preliminary flat rate will be charged in addition to the distributions for a distributing fund.
However, the tax burden on an accumulating fund is at most as high as that of the distributing fund. This is why the deferral effect usually applies to the distributing fund. This is very attractive for long-term investors.

The saver’s allowance (Sparerpauschbetrag) provides opportunities for investors to save on taxes. Both methods take advantage of the saver’s allowance, as tax-free fund income is not taxed again—such as during the final sale. Therefore, it makes sense to fully utilize the saver’s allowance, for example, by using distributing ETFs.

Many brokers offer automatic reinvestment, allowing the distributing ETF to cover its income with the saver’s allowance while still providing the compound interest effect of an accumulating ETF.
Alternatively, sales can also be made with an accumulating ETF. In this case, just enough shares are sold to fully utilize the saver’s allowance.

Avoiding Gift Tax with ETF Accounts

For (married) couples, the question arises whether to open a joint account or two individual accounts. Since gift tax may come into play with a joint account, the clear recommendation is to always open two separate accounts.

Explanation

For married couples, the gift tax exemption is €500,000 over a 10-year period. For unmarried couples, it is only €20,000. If only one partner deposits money into the account, half of it will be considered a gift by the tax office, as the wealth belongs to both. Even if unequal amounts are deposited into the account, gift tax must still be considered.

The sensible approach is to open two separate accounts and, if necessary, grant each other powers of attorney. This way, partners can access each other’s accounts, but the gift tax exemption remains untouched.

Summary

The capital gains tax is 25%, plus an additional 1.375% solidarity surcharge (Soli) and possibly church tax. It is applied to interest, dividends, and realized capital gains.
As a withholding tax, the capital gains tax is directly deducted at the source, i.e., by the account provider. Therefore, you should set up an exemption order (Freistellungsauftrag) to make use of the tax-free allowance, known as the saver’s allowance (Sparerpauschbetrag), which is €1,000 for individuals or €2,000 for married couples.
The preliminary flat rate (Vorabpauschale) is mainly applicable to accumulating ETFs. However, accumulating ETFs often provide a tax deferral effect for investors.
To save taxes, it is advisable to fully utilize the saver’s allowance – this can be done with distributing ETFs, through the preliminary flat rate, or by making sales.

Reference

ETFs und Steuern: Steuerliche Aspekte beim Investieren

ETF Portfolio Reblancing

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

Through rebalancing, you can bring your portfolio back into balance so that it aligns with your originally defined asset allocation and, therefore, your strategy.
Rebalancing is important in a passive strategy to increase returns and maintain your risk level.
We recommend reviewing your portfolio for rebalancing once a year at a fixed time. You don’t need to take action for small deviations from your asset allocation.
You can rebalance your portfolio by adjusting your savings plan or through (partial) sales and purchases of shares.

What is Portfolio Rebalancing?

It may sound contradictory for a buy-and-hold investor to engage in rebalancing and reallocating. But especially in a passive strategy, this corrective measure is important. Active investors often let the market determine the weighting of their portfolio and usually don’t rebalance consciously or frequently.

Rebalancing helps you maintain your risk level

As a long-term investor, it’s important to stick to your personal risk tolerance and maintain the risk level you originally defined in your asset allocation. This is where rebalancing comes into play as a corrective measure.

Example: If your asset allocation aims for 40% of your portfolio to be in low-risk assets, but your riskier assets perform well and grow in value, the proportion of your low-risk assets decreases. This results in an overall increase in your portfolio’s risk.

Increase returns with rebalancing: mean reversion

One key argument for rebalancing as a passive investor is the market’s tendency to return to its long-term (return) average—known as mean reversion.

According to this theory, assets that have performed exceptionally well are likely to perform below average in the future, while underperforming assets are expected to recover.

Intuitively, most people tend to hold onto stocks that are rising in value—we don’t like letting go of “winners.” But theory clearly suggests: asset classes that have outperformed will slow down, and those that have lagged behind will catch up. So by rebalancing, you’re actually doing something beneficial for your long-term returns.

When is the Right Time for Rebalancing?

It it recommended checking your portfolio for rebalancing once a year. It’s best to set a fixed date in your calendar—perhaps at the beginning or end of the year—and take the time to do it then.

However, rebalancing only really makes sense if your allocation has deviated by 5% or more from your original target.

With our rebalancing calculator, you can easily find out in which direction your portfolio has shifted and how you can restore your original asset allocation through rebalancing.

Example calculation: Is rebalancing necessary?

In this example, we’ll demonstrate how price developments can impact the ratio between risk-free and risk-bearing assets in your portfolio.

We assume a starting portfolio value of €10,000 with the following asset allocation:

30% risk-free portion (e.g., in a savings account) = €3,000
70% risk-bearing portion (e.g., global equity ETF) = €7,000

	💰 Risk-Free Portion (Savings Account)	📈 Risk-Bearing Portion (Global Equity ETF)	⚖️ Ratio Risk-Free vs. Risk-Bearing
Original Asset Allocation	€3,000	€7,000	30% vs. 70%
Scenario A (Moderate Gain)	€3,000	€8,000 (+€1,000 unrealized gain)	27.2% vs. 72.7%
Scenario B (Strong Gain)	€3,000	€12,000 (+€5,000 unrealized gain)	20% vs. 80%
Scenario C (Loss)	€3,000	€5,000 (−€2,000 unrealized loss)	37.5% vs. 62.5%

Explanation

Scenario A: the risk-bearing portion gains value, increasing its share to 72.7%. Our take: there’s no need to rebalance just yet.
Scenario B: the original asset allocation of 30% risk-free and 70% risk-bearing has shifted significantly and now stands at 20% vs. 80%. This scenario could happen if stocks perform exceptionally well in one year. A rebalancing is required.
Scenario C: the risk-bearing investment performs poorly, there is also a significant discrepancy from the original asset allocation. This scenario might occur during crises—for example, during the “Corona Crash” in spring 2020. The share of your risk-bearing investments needs to be increased.

Asset allocation in a global portfolio

The same principle applies when rebalancing between equity ETFs within your stock portfolio.

Example:

If you’re managing a classic global portfolio with an allocation of 70% MSCI World and 30% Emerging Markets, and the MSCI Emerging Markets performs significantly better, rebalancing makes sense in order to restore the asset allocation of 70% to 30%.

In this case, you can restore the balance by pausing the savings plan for the MSCI EM, so the MSCI World portion will automatically become larger. Alternatively, if you’re not using any savings plans, you can achieve this by selling a portion of your MSCI EM shares.

Rebalancing in Practice

Rebalancing via savings plan

If you’re investing in ETFs and stocks through a savings plan, you can use it effectively for portfolio rebalancing.

This can be done by

Goal	Action
Reduce the share of a specific ETF	Adjusting the savings rate Temporarily suspending one of your savings plans
Give the riskier portion of your portfolio a higher weight	Increase the savings rate Reduce the amount allocated to the risk-free asset Adjust the frequency of your savings plan, buying shares less or more frequently

👍 Advantage: In most cases, there are NO additional costs 👏.

👎 Limitation: When the size of your portfolio is already large, but your savings plans have a relatively small savings rate. In such cases, it is often more efficient to buy or sell shares directly.

Rebalancing through partial sales and purchases

When dealing with larger amounts or if you’re not investing through savings plans, you have the following option: You can sell (part of) your shares and buy new ones to balance your portfolio.

Selling part of your ETFs that have performed above average to reduce the risky portion of the overall portfolio.
Increase the shares of those that have not performed as strongly by purchasing more.

Example

	Risk-Free	Global Stock Portfolio
Original Allocation	€10,000 (20%)	€40,000 (80%)
Capital Growth	+€0 (0%)	+€16,000 (+40%)
New Allocation	€10,000 (15.15%)	€56,000 (84.84%)
Rebalancing through Partial Sale	+€3,200 (Increase)	-€3,200 (Partial Sale)
Restored Allocation	€13,200 (20%)	€52,800 (80%)

Costs of Rebalancing

If possible, you should rebalance via a savings plan, as this incurs no additional costs and allows you to keep your full return.

In the exceptions discussed above, where rebalancing requires partial sales and purchases, the following costs apply:

Transaction fees for each order
Taxes on your gains from partial sales

You should also consider the cost factor when deciding whether rebalancing is necessary. For tax reasons, it might sometimes make sense to rebalance through purchases instead of sales, as you will not pay taxes on a gain initially and can allow the money to work for you for a longer period.

Reference

ETF Portfolio Rebalancing erklärt!

Decumulating an ETF Portfolio the Right Way

Fri, 07 Mar 2025 00:00:00 +0000

Decumulation refers to the withdrawal of previously invested savings. It’s also known as disinvestment.
Money invested in ETFs can either be sold off gradually or you can live off the distributions (dividends) they generate.
The idea that high-dividend ETFs are better suited for decumulation—or that they generate higher returns—is a persistent myth. In fact, the tax treatment of partial sales can be very advantageous.
Traditional decumulation options also include fixed withdrawal plans through banks or immediate annuities, though these tend to come with higher costs and less flexibility.
For gradual decumulation, it’s important to have a rough withdrawal plan, which outlines a schedule for selling ETF shares over time.

What is decumulation?

Decumulation is the opposite of saving – it refers to the process of withdrawing saved assets. This process is also called disinvestment or asset drawdown. The goal of decumulation is to convert (in our case, ETF-invested) capital back into cash to use for living expenses, for example.

There are various strategies to draw down savings. From a tax perspective, it’s generally not advisable to liquidate all of your invested funds at once, as this could exceed tax-free allowances and trigger a large tax bill! Additionally, once fully disinvested, your capital can no longer continue to work for you.

Step-by-step: Decumulation through Partial Sales

The first option for decumulating assets is to gradually convert your invested capital into liquid funds. For ETFs, this means selling ETF shares piece by piece. It’s essential to create a plan in advance to structure these partial sales.

This begins with determining your financial needs—perhaps you have other sources of income and don’t rely solely on ETF withdrawals.
Your plan should be based on a rough time schedule.
- Planning can be tricky, as it’s impossible to predict how long you’ll need this income during retirement.
- Market volatility is another factor to consider—ups and downs in the stock market can significantly affect your portfolio value, especially during a market crash.
  
  However, since passive investors usually have a long investment horizon and decumulate over decades (e.g., 20–30 years), such negative market events tend to average out over time.
Tax considerations are also important when planning gradual decumulation. If you’ve chosen a tax-optimized investment strategy, only a portion of your ETF shares may be subject to tax.
It’s also worth noting that decumulation may incur higher transaction costs than accumulation. (That’s why it’s important to understand your broker’s fee structure!)

Living off Distributions

The second way to generate withdrawals from ETFs is through distributions.

Non-accumulating (distributing) ETFs are ideal for this strategy, as they regularly pay out a so-called distribution yield, which can be used to cover living expenses
Dividend-focused ETFs, which invest in stocks with high dividend yields, are also suitable for such a retirement strategy.

However, this approach still involves some dependency on market fluctuations, which introduces uncertainty. Additionally, in times of economic crisis, dividend yields are often reduced—making this strategy less reliable during downturns 🤪.

Withdrawals via Distributions vs. Partial Sales

Expected returns are the same whether you withdraw capital via distributions or generate a “virtual return” through partial sales.
The key difference lies in the amount withdrawn in relation to the size of the portfolio. Only once withdrawals exceed a certain level does the portfolio begin to shrink.
Partial sales offer the advantage of more flexible tax management. They also allow investors to better balance out market fluctuations by choosing when and how much to sell.
Using “high distribution yield” as a criterion for selecting ETFs is ultimately arbitrary and can even be a disadvantage in the long term. What investors should really focus on is the total return of their investments.

De-coupling

A third variant, which is less common in the ETF sector, consists of financial products with an incorporated decoupling plan. These include

bank payout plans
immediate annuities
fund payout plans (Only this type of decoupling is potentially available with ETFs)

The advantages of immediate annuities and bank payout plans are the high security of payments, while the disadvantages in all three cases are the high costs, lower returns, and lack of flexibility compared to a passive investment approach with self-determined divestment.

Conclusion: hybrid forms of fixed decoupling plans within the framework of fixed or overnight deposit investments, combined with capital market-dependent payouts or partial sales of ETFs, are conceivable, offering a certain degree of security and flexibility individually combined.

Reference

Portfolio richtig entsparen

Exchange Traded Fund (ETF)

Sat, 01 Mar 2025 00:00:00 +0000

**Reference: Finanzfluss ETF Handbuch**