It is worth investing in ETFs

ETF: savings plan versus one-time investment

The recovery rally that the German share index (Dax) made on the stock exchanges after the Corona crisis is impressive: Since the annual low on March 19 at around 8,255 points, the top German index has gained more than 5,000 points - that is a plus of a good 60 percent in three months!

However, the Dax had rushed around 40 percent in the four weeks before and recently gave way again. Compared with the all-time high on February 17 of this year at almost 13,800 points, the leading index is still almost 1,000 points or just under eight percent lower. The minus has been around four percent since the beginning of the year. Nevertheless: Anyone who would have entered the Dax with a monthly ETF savings plan at the beginning of January would already be clearly in the black.

ETF savings plans cushion crises

A look at past crises also shows that a monthly savings plan can show its strengths compared to a one-off investment, especially in turbulent phases on the stock market. This can be seen from the so-called return triangle for the global MSCI World index. It shows the average return on an equity investment made at the beginning of a certain year in the following years - including dividends and investment costs.

The investor and stock expert Christian W. Röhl calculated two different versions of the triangle for the period from 1972 to 2019 on a euro basis. On the one hand, in the case of a one-off investment in shares. On the other hand, Röhl considers the case that an investor invests a fixed amount in the index every month, as in an ETF savings plan.

Example of a dot-com bubble

For example, if you invested a single sum in the MSCI World Index at the beginning of 2000 shortly before the dot-com bubble burst, your portfolio remained in the red for 13 years. Only at the end of 2013 was there a slight increase of 0.5 percent on average. That is significantly worse than with the ETF savings plan, which already achieved an average return of 4.1 percent per year after just six years. Although the savings plan depot dipped back into the red in the meantime in the financial crisis of 2008/2009, at the end of 2010 it was already back in the profit zone at 1.9 percent per year.

The entire balance sheet for the past 20 years is also in favor of the savings plan. While the one-time investment achieved an average annual return of 3.7 percent from the beginning of 2000 to the end of 2019, the monthly savings brought in a return of 7.9 percent per year.

Compound interest effect higher for one-off investments

However, one must not forget the compound interest effect with a one-off investment. After all, with a one-off investment, the entire investment capital is compounded from the start.

For example, if you had put 300 euros a month in the MSCI World Index over the past 20 years, the total payment would be 72,000 euros. With an average return of 7.9 percent per year, the increase in value would be just under 98,000 euros. The one-off investment of EUR 72,000 would have brought in around EUR 77,000 per year at 3.7 percent over the same period.

If, on the other hand, one selects the past ten years as the observation period, then both the one-off investment and the savings plan would have achieved an average return of 11.9 percent per year. In this case, however, the one-off investment does significantly better due to the compound interest effect: With an investment capital of 36,000 euros, for example, investors would have achieved 75,000 euros in value. If, on the other hand, the 36,000 euros had been stretched to 300 euros per month over ten years, the increase in value would only be 31,000 euros.

also read: ETFs versus active funds - who is ahead?

The new savings plan return calculator from biallo.de

With our new savings plan return calculator, you can have your expected increase in value calculated. Simply enter the monthly savings rate, assumed return, the term and the savings interval and you will receive the result. With the savings plan return calculator, you can also compare the increase in value achieved with a one-off investment. You can also set a savings target that you want to achieve within a certain period of time and have the savings rate calculated for it. Just try it out, it's worth it!

Regular savings rates lower the risk

The examples show: Anyone who opts for a share savings plan with ETFs needs staying power. But it's worth it - even if the investment is made during a dramatic crisis. "The longer one was invested, the lower the risk of loss," says investor Röhl. The return triangles show in general: "From a horizon of 15 years on, you have not lost any money with global stocks in the last half century, regardless of the entry and exit times."

The fact that an ETF savings plan has performed better than the one-time investment over the past 20 years is due to the regular savings rates. They ensure risk diversification because the shares are bought in different market phases. If the stock market does not do well, prices are low. However, this has the advantage that investors automatically purchase shares at low prices via the savings plan. The bottom line is that over time an average price arises for the shares, which makes profits very likely in the long term. Stockbrokers speak of the so-called "cost average effect".

However, the ETF savings plans are not entirely without risks. Even with a long investment horizon, investors should keep in mind that there are always market phases on the stock market in which it would be bad to sell shares. The investment horizon should therefore "not be too rigid," says investment expert Röhl. "If you have to get your money at a certain point in time, you shouldn't wait until just before close to 'relinquishing' and create a little liquidity in good phases," he advises. The money can then be safely parked as overnight money or short-term fixed-term deposits.

The cost of the savings plan is crucial

In addition, there is a currency risk, especially with savings plans based on international indices, such as the worldwide MSCI-World. The majority of the stocks in the MSCI World run on a dollar basis. So if investors in this country buy shares at a high dollar rate compared to the euro and sell them again at a low dollar rate, the return will be reduced.

You should also pay attention to the costs of the savings plans. They differ significantly from provider to provider. This is particularly important for smaller savings rates. For example, with a savings rate of 50 euros per month and a flat fee of two euros per execution, the costs are four percent. You have to catch up with that through price gains.

Also read:Free ETF savings plan - promotions from online brokers

So-called Robo-Advisor ETF savings plans are relatively inexpensive. They were indeed criticized in the recent stock market crash because the automated asset managers can only react to such price crashes to a very limited extent in comparison to a fund manager. The return triangle on the MSCI-World shows, however, that this does not have to be a disadvantage. At least not if you have a long-term investment horizon - and at the end of the investment period you remain flexible about the exit point.

Also read:Performance comparison of robo-advisors

What is an ETF savings plan?

ETF savings plans are ideal for building long-term capital. Investors can save even with small amounts every month. At some banks this is already possible from 25 euros, but usually from 50 euros. Since the same amount is always invested when saving installments, you buy more ETF shares with low fund prices than with high fund prices. The bottom line is that this results in low average costs.

ETFs invest in an entire market in a balanced way and automatically adapt to market conditions when there are changes. This reduces investment risks and strengthens the return. Since the internal fund costs are also low, savers enjoy the best prospects for income.

Investors are spoiled for choice. More than 1,500 ETFs are now available on the market and the number is increasing almost every day. The consumer advice centers favor global indices, for example the international MSCI World Index. He spreads the risk across 1,600 stocks of leading companies from 23 industrialized countries.

Also read:The best MSCI World ETFs at a glance

How do you find the right ETF when even those that refer to the same index differ in terms of mapping type, costs and performance? The following tips provide information on how to find the right investment strategy.

How do ETFs work?

Exchange Traded Funds (ETFs) are passively managed index funds. ETFs are usually issued by investment companies and can be traded on the stock exchange like stocks.

This means that they have a securities identification number (WKN) or ISIN (International Securities Identification Number) - quasi the "identity card" of a security. Shares in ETFs can generally be bought or sold by investors on every trading day.

also read: Exchange for beginners - securities trading simply explained

Performance

The performance of ETFs is easy to understand because they always track an index or a special basket of securities one-to-one. This can be a national or international stock index, a commodities, real estate or even bond index.

This means: With ETFs, investors can trade entire markets, such as the German Dax stock index or the German Rex bond index or a gold or oil market, simply and inexpensively like a share.

ETFs have no term limit, investors can buy and sell shares at any time. Current prices ensure constant tradability and liquidity. The fund shares are stored in a private securities account.

also read: ETF beginners should be aware of these pitfalls

Different types of index replication

There are differences in the way in which the respective ETF tries to replicate its underlying index (benchmark) as closely as possible. Two investment approaches pursue the same goal: The exact replication of the benchmark index, but the structure is very different.

Physical replica: These ETFs invest in the individual values ​​of the benchmark, which means that the fund buys exactly the same amount of the stocks or bonds in question that is currently contained in the index. If the market capitalization of a security increases or decreases, the ETF reacts accordingly.

also read: The difference between physical and synthetic ETFs

Synthetic replica: These ETFs map the index development through swap transactions with other market participants, i.e. by means of proxy issued stock exchange securities, for example certificates. The main difference here is a slightly higher risk, as the provider of the certificate can go bankrupt and this risk can have a limited impact on the ETF.

Risk protection: Regardless of whether they are physical or synthetic, ETFs are managed as special assets like traditional investment funds. This means that in the event of the fund provider becoming insolvent, the value of the units will not be lost, but the assets will remain reserved for investors.

Also read:This is how smart beta ETFs work

What should be considered with savings plans?

1. Investment horizon

With an ETF savings plan, you invest your money in the stock market. Fluctuations in value are the order of the day here - one should be aware of this. ETF savings plans are therefore not suitable as a short-term investment. In the long term, the price gains compensate for losses in the meantime and generate attractive returns.

Example Dax: According to the yield triangle of the Deutsches Aktieninstitut (DAI), the leading German index Dax has achieved an annual return of 7.3 percent over the past 50 years despite recurring crashes - much more than savings books or bank savings plans.

The savings goal should therefore be a long way off and, if possible, not have a fixed end date. Otherwise it can happen that for the targeted saver, the stock exchanges are down and prices are low. If you then have to sell, you would have lost a large part of the gains made.

  • Biallo tip: Relocate accumulated profits or credits successively into low-fluctuation securities against savers. A complete exit can also make sense when the stock market peaks.

2. Flexibility and tradability

The good thing about ETF savings plans is their high flexibility. Savers can get on and off or change the savings rate at any time. There are no notice periods. This is not possible with savings plans with insurance companies, such as private pension insurance on an ETF basis.

Many banks, savings banks and online brokers offer ETF savings plans starting at 25 euros per month. This is saver-friendly, but the savings rate shouldn't be that low if you want to save a significant amount. Anyone who invests 25 euros a month for ten years will achieve a result of around 4,000 euros with a return of six percent - capital build-up looks different.

  • Biallo tip: It is good if the bank allows further savings intervals in addition to monthly purchases. Some savers want to invest quarterly or every six months.

also read: ETF savings for children

3. Number of ETF savings plans

If the ETF custody account is not only to be equipped with a German or European standard ETF, it is worth paying attention to the largest possible selection of savings plans. Online brokers and direct banks, which usually have hundreds of ETF savings plans, are positive here.

Some examples:

In contrast, traditional branch banks often only hold a few ETFs. Reason: Branch banks prefer to sell the traditional investment funds, which are more productive for them.

4. Orders free of charge

The profit lies in purchasing - many a merchant has already become rich with this rule of thumb. What applies to trading also applies to investments. The lower the costs of acquiring funds or other securities, the sooner the investment will turn out to be profitable and the higher the return will be in the end.

The purchase of inexpensive ETF shares takes place on the stock exchange. The bank and online broker charge an order fee for this. The fee varies from bank to bank. Some providers charge flat fees (e.g. DKB, Flatex, Postbank), others depending on the volume of the order (e.g. Comdirect, Consorsbank, ING), and still others combine both variants (Volkswagen Bank).

Costs: On average, banks charge an order fee of 1.5 to 2.5 percent per savings plan execution. This is quite cheap compared to traditional equity funds, because here there are usually five to six percent issue surcharge. Nevertheless, the costs are not insignificant. A monthly savings rate of 150 euros with a 2.5 percent purchase fee results in at least 45 euros in order fees over the year.

So it's worth looking for an inexpensive bank. Investors go best when the money house completely waives fees. As a rule, there are free ETF savings plans for a limited time or the offer is only valid for certain fund companies. Savers then have to find out how long the promotion runs and which funds are benefiting from it. The following table shows an example of how many free ETFs banks have and what fees are incurred for regular withdrawals:

ETF savings plans in a cost check

Financial institutionNumber of ETF savings plansETF savings plans without an order feeRegular costs per order / savings rate
Onvista1501,00€
Flatex1.0002501,50€
Consorsbank5602701,50%
DKB800119 with reduced execution fee (€ 0.49)1,50€
S broker5901102,50%
Comdirect6001351,50%
Maxblue180961,25%
ING7001501,75%
Finvesto9000,20%
Postbank14080,90€
Commerzbank18050.25% plus € 2.50
Volkswagen Bank250640.50% plus € 3.50
1822 directly880492,95€

Source: own research / status: October 1, 2020.

Note: Some providers are not linked because they do not want to acquire new customers through us at the moment. We have transparently disclosed how we finance ourselves in the "About us" section.

Biallo tip

What should be considered when choosing a fund?

1. Different ETF costs

Internal fund fees, among other things, have an impact on the performance of ETFs. ETFs are comparatively inexpensive because they are controlled by computer programs and not by expensive fund managers. Nevertheless, the fund companies also charge a fee for the "computer work". Since the fees are squeezed annually from the fund volume, just a few tenths can have an impact on the long-term performance.

This becomes clear, for example, in the Comstage MSCI World UCITS ETF and the Lyxor MSCI World UCITS ETF. The Comstage ETF (synthetically replicating) only charges 0.2 percent annual fee and has achieved an average gain in value of 10.86 percent per year over the past five years (as of October 1, 2020). The Lyxor ETF (synthetic replicating) raised 0.3 percent and only managed 9.90 percent per year in the same period.

Biallo tip: When setting up the ETF savings plan, pay attention to the total expense ratio (TER) of the fund. This fee indicator shows the sum of all costs and fees in relation to the volume of a mutual fund. Only the order fee is not taken into account. Advantage for the investor: In contrast to the pure management fee, the TER includes all cost factors that influence the performance of a fund.

The level of the TER varies not only from fund to fund, but also from fund class to fund class and from investment region to investment region.For example, ETFs on the Dax are very inexpensive, as this index can be replicated easily and inexpensively. Fund companies usually charge fees between 0.08 and 0.15 percent of the fund volume.

Also read:This is how VL saving works with ETFs

The situation is different if, for example, you want to invest in an ETF geared towards Asia. Here the expense ratio averages between 0.5 and 0.9 percent per year. The likelihood that an expensive ETF will perform worse than a cheaper one is particularly high with these cost differences.

Biallo tip: So-called robo-advisors are a suitable alternative for those who do not want to or cannot design their financial investments completely themselves. Most providers also offer ETF savings plans that are individually tailored to the investor's risk profile. Asset management, including transaction costs, account and custody account management, is already available for less than one percent of the investment volume.

2. Pay attention to fund size

It is also important for investors to make sure that the investment volume of the fund is not too small. This also applies to ETFs. Otherwise there is a risk that the fund will be closed or merged with another fund for lack of profitability.

The size of a fund is an important indicator of its success. If the fund contains little investment volume, the fund costs can be higher than the return. Since the fund costs are incurred regardless of the amount of fund units sold, the fund becomes unprofitable for the investment company - there is a risk of closure.

So that you are not affected by this, you should pay attention to a certain minimum volume of the ETF. Fund experts recommend at least 50 million euros, better is 100 million euros.

Biallo tip: You can find out how large the volume of a fund is in the fund prospectus or on the website of the custodian bank.

Also read our guide:Beware of ETFs that are too small

3. Avoid custody fees

With ETF saving, the costs for safekeeping can reduce the net income of the savings plan. Individual branch banks charge up to 1.0 percent of the deposit volume. Consequence: If the value of the total portfolio increases by five percent in one year, the bottom line is that only four percent profit remains.

Direct banks and online brokers are significantly cheaper. In the savings plan process in particular, many providers completely forego fees. Consorsbank, Flatex, ING, DKB and Onvista, for example, generally do not charge any custody fees.

Other banks also advertise free custody accounts, but attach certain conditions to them. Some examples:

  • Comdirect: The Quickborner Direktbank securities account is free for three years. According to this, investors still do not pay a cent if they make at least two trades per quarter or regularly pay into a securities savings plan or use the bank's own checking account. Otherwise the deposit costs 1.95 euros per month.
  • 1822 direct: With the online subsidiary of Frankfurter Sparkasse, the deposit remains free of charge if at least one order is placed every quarter. Otherwise: 3.90 euros per month.
  • Volkswagen Financial Servicec: There are no fees if customers make at least two trades per year or use a checking account with Volkswagen Bank or if they have a deposit of at least 10,000 euros at the end of the month. Otherwise: 1.95 euros per month.

Biallo tip: For banks with restrictions, investors should know exactly what they want. Anyone who would like to use a current account with this bank anyway can take advantage of the favorable terms in "passing" with them. The same applies if you operate a fund savings plan or ETF savings plan. On the other hand, it cannot be certain whether individual shares or certificates will be bought regularly.

also read: Are ETFs really better than actively managed funds?

Custody fees at branch banks

The custody account in the bank branch is rarely free. The Sparda banks, for example, waive custody fees with a monthly savings rate, otherwise at least 9.95 euros to a maximum of 24.95 euros per quarter.

In the case of savings banks and major banks, it is usually more expensive. Here the fees depend on the deposit volume. Examples:

  • Commerzbank: The "Premium-Fonds-Depot" of the second largest private bank in Germany costs a flat rate of 0.9 percent of the custody assets per year; but at least 90 euros per quarter. Investors can trade over 200 funds and ETFs with no transaction costs. The normal online depot is free of charge with one order or more per quarter, otherwise 0.175 percent or at least 4.90 euros per quarter will be charged.
  • Deutsche Bank: The "private depot dynamic" is not for small depot volumes. For a market value of 50,000 euros, a 1.0 percent commission is charged at 500 euros per year. Within ten years, the total costs add up to 5,000 euros! The minimum price for this depot is 288 euros per year. In return, investors benefit from lower transaction costs. The "Private Depot Comfort" for occasional traders costs 0.14 percent per year for portfolios of up to 50,000 euros, at least 19.99 euros per year.

Biallo tip: Deutsche Bank customers can use the free depot of the online subsidiary Maxblue or access the in-house robo-advisor Robin. The digital asset manager requires between 0.8 and 1.0 percent per year for portfolio management, account and custody account management, depending on the investment volume.

also read: Robo-Advisor in a performance comparison

ETF portfolios for various types of investors

Before you fund your ETF portfolio, you should determine what type of investor you are. After all, ETFs can fluctuate a lot or less. Those who find it difficult to deal with price declines should use ETFs with as little fluctuation as possible. Bond ETFs are particularly recommended here. Conversely, if you are aiming for a long savings period and are not afraid of fluctuations in value, you can mainly rely on equity ETFs.

The Morningstar rating agency has put together four sample portfolios for different types of investors, which are briefly presented below:

The simple portfolio:

For those on a tight budget, Morningstar recommends a simple equity-bond portfolio. It consists of an ETF on the MSCI World Index on the equity side and the Barclays Euro Aggregate on the bond side in a ratio of 60:40. The strength of these composite indices: They are set up in a stable manner and are regularly rebalanced, i.e. returned to the original position. This means that the investment strategy always remains in the desired direction.

The diversified portfolio:

Larger savings can be divided up more finely. The diversified portfolio consists of eleven ETFs. It contains emerging market shares in the form of the MSCI Emerging Markets, as well as ETFs on industrialized country indices and various country ETFs. American mid and small caps are weighted at five percent each. The bond quota of 35 percent is contested by the Barclays Global Aggregate Bond.

The real economy portfolio:

On the equity side, more and more risky investments are made in exotic markets. Emerging countries are used much more. As with the diversified ETF portfolio, the global bond index can also be found.

The inflation-curbing portfolio:

Here, the inflation risks on the pension side are given greater consideration. Inflation protection bonds make up a total of 25 percent of the portfolio. In addition, there is a gold quota of ten percent for raw material fans. On the equity side, the MSCI World and the MSCI Emerging Markets are used. This deposit is more for investors who are willing to take risks.

also read: Investing in ETFs - The right investment strategy counts

Biallo reading tip

Low costs, good returns - this is what so-called robo-advisors promise. You can read exactly how digital asset managers work in our Robo-Advisor guide.

Questions and answers about the ETF savings plan

What is an ETF?

An ETF, or Exchange Traded Fund for short, is an exchange-traded index fund. Its aim is to replicate a specified stock market index, such as the Dax or the US Dow Jones, as precisely as possible so that the fund achieves the same performance as the index. Since the composition of the ETF is determined by the reference index, there is no need for a fund manager to monitor the fund. This work is done by computers, which is why we speak of passively managed funds.

Do ETFs offer cost advantages?

Yes, ETFs are cheaper than actively managed equity funds due to their passive investment structure. The cost advantage can be up to two percent per year. Typically, the running cost of an ETF is 0.2 to 0.3 percent per year. There are no issuing surcharges with ETFs as with active funds. However, in addition to the order fees, ETFs incur additional trading costs, which arise either from the bid-ask spread when buying on the stock exchange or from the so-called Additional Trading Costs (ATC) when buying over the counter via fund platforms or direct banks. Depending on the ETF, the ATC is zero to 3.0 percent, on average they are around 0.25 percent.

Where do I buy ETFs?

ETFs are rarely offered at bank counters, as the banks earn almost nothing from them. To buy ETFs, direct banks and online brokers are recommended. They offer a large selection, often several thousand pieces. If you select the ETF category in the order mask, the purchase will take place automatically on the exchange.
  • Biallo tip: Numerous banks and online brokers have ETF promotions in their program, where the order fees and ATC are reimbursed for certain products. You can find more information about this in our "Free ETF savings plan" guide.

How long do I have to hold an ETF?

In contrast to a bank savings plan or pension insurance, you do not enter into a contractual term when buying an index fund. You can sell ETF shares at any time, suspend or terminate a savings plan or change the rate. The length of the term is based on your savings goal. Pension savers naturally have a long savings horizon; potential property buyers who want to build up equity tend to have a shorter one. The past 50 years have shown: Anyone who has consistently saved an ETF on the MSCI World Index for at least 15 years has achieved a positive return at every entry point. However, there is no guarantee that this will continue to be the case for the next 50 years. However, the probability is very high.

For which type of investor are ETFs suitable?

ETFs are suitable for almost all investors. Countless equity ETFs are available for offensive investors, for example the iShares Core MSCI World UCITS ETF. Risk-averse, defensive investors will find an abundance of bond ETFs, for example the Lyxor ETF Euro Corporate Bond. Positive: In contrast to actively managed funds, ETFs never perform worse than their respective benchmark index, but neither do they do better. However, if you want to save a set amount on a specific date, ETFs are unsuitable due to fluctuating fund prices. In this case, time deposits or savings bonds are recommended.

What are the risks of ETFs?

ETFs involve typical stock market risks, such as price risk or interest rate risk. If you get on and off at inconvenient times, this can result in a loss of value. There is also a certain currency risk with ETFs that invest predominantly in shares outside the euro area. In addition, ETFs shouldn't be too small in terms of liquidity. Positive: ETFs belong to the special assets of a fund company. This means that if the fund company goes bankrupt, the fund shares are not affected, they continue to belong to the investor.

Which indices are particularly suitable for savings plans?

Long-term savers should primarily rely on a wide range of stock indices, for example the MSCI World Index or the Stoxx 600 Europe. Well diversified stock indices are less prone to fluctuations than market indices or industry indices.

Can you save VL services with ETF?

Yes, some banks have ETFs in their range for this, such as Commerzbank or its subsidiary Comdirect. The Ebase subsidiary Finvesto even offers a VL custody account with ETFs. Please also read our guide "VL-Sparen mit ETFs".

Better distributing or accumulating ETF?

ETFs also benefit from stock dividends. If the share distributions remain in the fund balance, they push the price thanks to the compound interest effect. Accumulating, i.e. reinvesting funds, are recommended if you want to build up your wealth. Examples of this are the iShares DivDax, the Vanguard FTSE All-World High Dividend Yield or the Xtrackers Stoxx Global Select Dividend. In contrast, distributing ETFs are suitable if you depend on regular investment income.

What is a synthetic ETF?

In contrast to a physical ETF, which tracks its reference index with real stocks or bonds, a synthetic ETF works via so-called swaps. To this end, the fund enters into an agreement with an investment bank that guarantees it exactly the performance of the desired index. In return, the bank receives the performance of any equity portfolio that the fund owns. Differences in performance are balanced out from time to time. This construction is more cost-effective for the fund company. The problem: If the swap partner (i.e. the bank) goes bankrupt, the swap transaction is not offset by a physical security, but a worthless bearer bond. With physical ETFs, investors are therefore more on the safe side.



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