An ETF savings plan is an inexpensive way to invest money for the long term. However, this form of investment is not entirely without risk.
You can find out about the benefits and risks in our guide. With the money you can get from a safe ETF plan you can try out netent slots for free.
ETF Savings Plan: What’s Behind it
An ETF (Exchange-Traded Fund) is a fund that replicates the performance of many shares in a share index. This means that you do not invest directly in one share, but participate in the performance of a whole series of them.
For example, the DAX comprises the 30 largest companies on the German stock exchange and a DAX ETF tracks the performance of this index. This is how it works:
The collected share prices of the 30 companies result in the price for the DAX.
An ETF copies its price performance – either physically (by actually buying the corresponding shares) or synthetically (the ETF provider does not buy any shares, but uses other financial instruments to ensure that its ETF replicates the price of the index).
If the share prices of DAX companies rise, your DAX ETF will also rise.
Example: You have invested money in a DAX ETF and the DAX rises by three percentage points. Then the DAX ETF also rises by three percentage points.
The advantage of ETFs: as an ETF reflects the share prices of many companies, i.e. contains a broad selection, the risk is spread.
This is because if a company is not so successful and its share price falls, this does not have a major impact and other companies can compensate for this price loss.
ETF Savings Plan: A Good Option For Long-Term Investments
With ETF savings plans, you need patience, like a gardener. With an ETF savings plan, you can save money every month. Experts at Stiftung Warentest recommend investing money in ETFs for the long term.
This means that you won’t need the money in the foreseeable future – ideal for retirement provision.
Capital-forming benefits (VL), for example, are ideal for this. Your employer will pay you up to 40 euros a month if you invest them in a savings account. However, you can also set up a savings plan for your private pension without VL.
How much you should invest each month depends on your individual financial situation, your return expectations and your need for security.
If you weigh potential returns and security roughly equally, you can, for example, put half of your savings into an ETF, while the other half ends up in savings accounts. You can find more tips on this in our guide to sustainable investments.
Most providers require a minimum rate for a savings plan. This means you have to invest a certain amount each month.
While the minimum rate for banks, for example, is 10, 25 or 50 euros per month, with so-called neobrokers (also known as trading apps) you can often start with just 1 euro per month.
In addition to the normal savings plan installments, you can also invest additional money in the ETF yourself. This can be an advantage if you are just starting to save and want to invest a large sum in the ETF quickly.
However, such one-off payments often incur additional costs, which you should find out about beforehand.
Best Suited for Beginners: World ETFs
ETFs that are based on large global equity indices are particularly suitable for beginners in the financial market. The MSCI World is particularly popular.
This is a kind of DAX, except that it combines the share prices of over 1,600 of the largest companies from 23 industrialized nations, and not just the 30 largest German companies.
An MSCI World ETF is therefore made up of many different sectors and regions. This has the advantage that gains in one sector or region can offset price losses in other areas.
However, there is also criticism of the MSCI World. Even if the name suggests a broad global diversification, it currently consists of around 70 percent US equities. This distribution is not intentional.
It is due to the fact that the index is made up of the companies with the highest market capitalization – and these are predominantly from the USA.
This cluster risk, i.e. the dependence on US equities, can be balanced out by also investing in European ETFs or emerging markets ETFs.
Alternatively, you can also choose an MSCI ACWI ETF (ACWI stands for All Countries World Index), which includes emerging markets as well as industrialized nations. Here, the US share is usually somewhat lower than in the MSCI World, but still very high.
There are also ETFs that only track individual sectors or countries, i.e. they are not as broadly diversified. With such specialized investments, find out exactly what the ETF contains and what future potential the sector has.
If you have not yet had any experience with the stock market, it is better not to experiment too much and opt for a global ETF.
Despite all the criticism, most experts consider such ETFs to be a solid basic investment that you can’t go too far wrong with, as long as you invest for the long term (at least 10, preferably even 15 years) and can therefore simply sit out global economic crises.
How an ETF Savings Plan Works
Choose an ETF with as broad a base as possible that tracks a global share index. The ETF should have been in existence for several years and have a high fund volume.
This will give you an overview of how closely the price performance of the ETF matches its benchmark index.
1. Take Out an ETF Savings Plan:
You can either take out ETF savings plans with your bank or online with direct banks and fund banks.
Not every bank allows you to pay into an ETF with a savings plan. Especially if you want to use your capital-forming benefits for this, check whether this option is mentioned in the sales documents.
Ask at another bank, as there are ETFs from different providers for the same share index.
If the ETF automatically reinvests the annual profits (accumulating fund), you benefit from the compound interest effect.
If the currency of the ETF is not the euro, the ETF is subject to currency fluctuations. If the exchange rate deteriorates, this will also affect your profit if you want to sell units.
2. Price Fluctuations:
With a savings plan, you buy new units every month at the current price. Smaller price fluctuations are therefore not a problem with a monthly savings plan – they even out in the long term (cost-average effect).
Don’t let falling prices worry you. Crises are part of the game and offer the opportunity to buy additional ETF shares at more favorable prices in the next monthly installment.
Whether it’s the coronavirus pandemic, the 2008 financial crisis or the bursting of the dotcom bubble at the turn of the millennium: So far, long-term investors have been able to sit out every global economic crisis over a period of 15 years without making a loss.
3. Fees and Conditions:
Low processing fees: The ETF copies an existing share index and can therefore operate with low management costs. As an investor, you benefit from this because you only pay very low processing fees for buying and selling ETF shares.
Fees when buying/selling: If you buy ETF shares, you usually also save the so-called front-end load. However, higher fees may well be incurred if you want to sell. However, purchases as part of savings plans are often free of charge.