Germany is not a country of shareholders. From my own professional experience, I can say that it is very difficult to get domestic savers excited about stock selection, even though the highest returns are tempting here.

But a relatively young form of stock saving is becoming increasingly popular. Many stock market beginners are turning to index funds (ETFs). Therefore, I will focus more on this topic in the „Closing Gong“ and start with a small series.

According to figures from Deutsche Börse AG, there are over 2,000 ETFs (Exchange Traded Funds) tradable in Germany. They manage assets of over one trillion euros.

What this means for you as an investor: Even if you focus on stock picking and may have one or two actively managed funds in your portfolio, you should consider this investment opportunity. Read here what makes ETFs so attractive.

It has never been easier to invest in an index „Can I simply buy the DAX?“ a reader recently asked me during an editorial consultation. Fortunately, the answer is „Yes, you can.“ Because that’s exactly what ETFs are for. These are open investment funds that simply replicate an index, such as the DAX, but also the Euro Stoxx 50, the S&P 500 or a whole range of well-known and lesser-known indices. There are two ways in which an ETF can replicate the underlying index:

Option 1 has the complicated name „full replication“. All stocks in the index are placed in the ETF portfolio with exactly the same share as they are represented in the index. I recommend this type of replication. Option 2 is „swap ETFs“. Here, the fund company may buy completely different stocks than those in the index. They only have to have a similar trend to the underlying index. A swap agreement ( „swap“) is then usually agreed with a bank: the bank promises the capital investment company that has launched the ETF to deliver exactly the performance of the index. In return, the bank receives what the actual securities purchased deliver. The media often warned about swap ETFs because the bank as a swap partner could become insolvent and fail. I do not deny this so-called counterparty risk. However, you should know: It is legally limited to 10% of the ETF volume. So you cannot say that you take on a significantly higher risk with swap ETFs than with fully replicating ETFs. Incidentally, swap ETFs always have the word „swap“ in their name. It is clear that by investing in an index, you spread your risk more than by buying a few individual stocks. And you automatically have the index winners in your portfolio. However, you also automatically buy the weak index stocks.

Huge advantage: Tradable on the stock exchange The abbreviation „ETF“ stands for „Exchange Traded Fund“. ETFs are usually only traded on the stock exchange. For actively managed funds (i.e. those managed by a fund manager), stock exchange tradability is not a matter of course. Often, the fund company does not want to give up direct sales and collects hefty fees when selling its shares, known as the issue premium (agio), which can amount to up to 5.5% of the invested amount. With ETFs, you get away much cheaper.

You always buy an ETF on the stock exchange and not from the fund company. In Germany, Xetra is the reference exchange for ETFs throughout Europe, and I also recommend that you buy your ETF shares there. „Reference exchange“ means: This is where the largest volumes are traded. The ETFs are accordingly offered cheaper.

The measure of how cheap or expensive a security is is the spread, the difference between the „bid“ and „ask“ or, in other words, between the „bid“ and „ask“ prices. Because two prices are always set on the stock exchange. Which one you get depends on whether you buy or sell a security. With ETFs, this spread is often only 0.1 to 0.3%. This is your surcharge, so to speak.

For comparison: With exchange-traded actively managed funds, the spread can easily be 1.5%. This is still cheaper than the issue premium. But still many times more expensive than with an ETF.

Which ETFs are a sensible investment? As I said: You have the choice between more than 2,000 ETFs in Germany. The question arises as to which are a sensible investment and which are not. I will provide you with the answer, together with many other exciting facts about ETFs, in the upcoming issues of the Closing Gong.