Sunday, September 22, 2013

ETFs - Selection

When I graduated from university and started my work life back in 2010, I decided that some part of my monthly salary should be held back for my own retirement.

Sadly enough, but in Germany we have a birth rate of 1.36 children per woman, even less than in Japan with 1.39. As a consequence, there are less employed people who have to finance the older generations’ pensions. This development is reflected in the ratio of employees to retirees which will be close to 1.00x by the year 2040. Some decades ago, this ratio has been in the area of 3.00x meaning that 3 employed workers used to finance the pension of 1 old retiree.

The state rent system of past decades used to be well-funded by masses of younger employees so that retirees were almost guaranteed a big part of their last salary as perpetuity. As an example, in the 70ies retirees were paid almost 70% of their last salary by the state rental system. In the meantime, this figure came down to 50% and is expected to further decline to a level of 30% for 2040 onwards. 

Being confronted with these figures, younger people should quickly come to the conclusion that they cannot rely on the state system alone and need to provide for the future via private pension plans. That's where the capital market comes into play.

I like the idea of directly investing part of my monthly salary in a private and flexible pension plan. When I started to inform myself about pension plans in 2011, I was not following the idea of dividend investing alone. At that time, I decided to invest in funds which should be both partly dividend-oriented as well as growth-oriented, exposed to mature as well as emerging markets.

I read many articles about fund investing and ETF investing and decided that I prefer ETFs towards regular funds as I think that the biggest part of the overall portfolio performance stems from the cost average effect, i.e. buying cheaply during stock market dips and thereby benefiting from market cycles whilst enjoying much lower administration expenses and low to none management fees.

When it comes to ETF investing, there are certain things to consider before choosing the right ETF for one's needs:

1. A) There are "swap-based" ETFs which replicate the performance of an index without holding every single asset of the index (it gets complex and costly if the ETF has to buy each 500 stocks of the S&P 500 for example). For Deutsche Bank ETFs (DB X-Trackers), swap contracts may only be used for max 10% of the overall portfolio value. Theoretically, the swap Contractor can be any financial institution which exposes the investor to a potential “default risk” of the Contractor. This sounds risky, but in case of DB X-Trackers the Contractor is Deutsche Bank itself which, in my view, reduces default risk significantly (if Deutsche Bank goes bankrupt, the worldwide banking system will be probably do so as well).

    B) Then, there are ETFs which use a “full replication” approach, meaning that the ETF holds the exact same assets in its portfolio like the index it is replicating (an ETF investing in the DAX would therefore hold all single 30 stocks in its portfolio in same weights like the DAX). 

2. There are ETFs distributing dividends in cash and there are ETFs directly re-investing dividends (without any potential tax impact on dividends).

3. There are ETFs in different currencies. Diversification across the main currencies such as USD, EUR, GBP, SGD, etc might be advantageous.

4. Market capitalization is another important criterion. The larger the ETF, the more liquid it stays in principle. This can enable the investor to quickly sell down even in a crisis scenario.

5. Diversification across sectors and geographies. In general, every ETF should provide information on the sectors and countries it is invested in thereby enabling the investor to calculate its overall portfolio exposure to sectors and countries.

6. Last but not least, one should also consider choosing different ETFs from different ETF providers to again enhance diversification.


Based on all these criteria I chose the following ETFs in which I invest €200,- on a monthly basis

*DB X-TRACKERS STOXX GLOBAL SELECT DIVIDEND 100 ETF 1D        

*DB X-TRACKERS MSCI AC ASIA EX JAPAN TRN INDEX ETF 1C

*DEKA MSCI EUROPE UCITS ETF

*ISHARES MSCI EMERGING MARKETS



Beliebte Posts