For quite some time now, I wanted to decide on how to invest frequently, ideally monthly, in a broad equity market, using a low cost product. These aspects clearly led me to the Exchange Traded Funds or ETFs…
The topic is very much discussed in more mainstream media during the last few years, since active managers do not outperform their benchmarks (read market indices) on average, surely not after cost. In a logical and mathematical way, that is to be expected. The historic result, likely to continue (link), is a broad trend of getting exposure to broad diversified equity markets via passive Exchange Traded Funds (ETFs), tracking a benchmark/equity index with very low costs involved. Low costs are not to be underestimated when investing the long run.
Side Note: There are some concearns about negative effects about ETFs on finnacial markets, like pushing the most valuable (expensive) companies even higher, since most ETFs (benchmarks) are linked to Market Capitalization. Discussed questions are How will the Valuations of these most valuable Companies react in a downturn and are many investors going to sell ETFs in a broader market downturn?
So, my decision was easy: I want to invest using ETFs on a regular basis. Subsequent questions were much harder though:
- Which ETF product — out of a whole lot — do I want to buy?
- Which broker do I want to use for buying the product?
Criteria for product decision
When deciding on which ETF to use for frequent investments, I want to take into account the following aspects:
- Low costs (product), ideally from a big player (i.e. BlackRock, Vanguard)
- Low fees (broker), ideally using an existing broker account with free buy promotions, and in general investable as a German private investor
- Frequent purchases, ideally monthly
- Reinvestments are preferred to distributions
- Non-synthetic solution preferred
- Open question: What index/market I do want to invest in?
Costs @ Purchase
When purchasing an ETF, there are various costs. Usually, there is a trading fee involved going to your broker and some additional fees going to third parties. Fees are often structured as a fixed fee and a proportional fee applicable to the trading volume amount (shares x price). Most brokers apply a minimum fee per trade, so that low volume buys carry higher relative costs.
Costs @ Product
Since the ETF has to be bear some costs annually, there will be some annual fee, usually referred to as Total Expense Ratio or TER. These fees got lower and lower within the last decade.
Until now, I only bought and sold Shares via Consorsbank. I opened up but never used brokerage accounts at DKB and Comdirect so far.
After reading about and comparing many brokers as well as ETFs I decided to set up a brokerage account at Trade Republic (I do not receive any monetary or other benefits for mentioning them here). Trade Republic can be described as a young FinTech where you can read more here. Currently, they only offer their service via an app and the offered services are very limited. But, they offer very cheap monthly ETF saving plans for zero order-execution fees. I am wondering if their bid/ask spreads are somewhat higher and I am going to watch this during the coming months… Based on this interview [only in German] their execution times sound good to me…
Trade Republic führt die Sparpläne ihrer Kunden flexibel im Tagesverlauf aus, aber immer zur XETRA-Handelszeit. Bei jedem ETF bezieht Trade Republic bei der Wahl des Ausführungszeitpunkts auch den unterliegenden Index und die enthaltenen Basiswerte ein. So wird beispielsweise ein S&P 500 ETF immer im Zeitfenster der XETRA und US-Börsenzeiten ausgeführt.extraetf.com
Currently, they only offer ETF savings plans for iShares products. But, I am quite fine with this for the moment, since iShares is one of the biggest providers and they offer cheap ETF products.
Decisions so far
- The USD is pretty strong. Since I live in Germany and my currency is EUR there is currency risk involved. But with the EUR crisis going on, this also has some upside or insurance character.
- The S&P is richly valued (based on various metrics). The ETF has naturally big positions in the big Tech Names. This could backfire but I wanted to get some more exposure to technology anyway.
I am planning to start some other saving plans for other products (maybe Japan and Emerging Markets) soon and will write updates about my monthly-etf-purchases accordingly …