Patrick Diel, ETF specialist and Head of Passive Sales at DWS, talks about ETFs as an alternative in the zero interest rate phase and new index trends. The growth of ETF savings plans shows their popularity with private investors.
Do ETFs also offer suitable alternatives?
Patrick Diel: Yes, especially in recent years, inflows into ETFs that enable sustainable investments have risen sharply. This is not surprising, as ETFs are in principle very well suited to this objective. Fundamentally, sustainable investment is about adhering strictly to the rules. The stocks or bonds selected must meet certain ESG criteria, i.e. environmental, social and governance criteria. These criteria may well be taken into account in the construction of an index. In detail, it’s not just market capitalization that determines weighting in an index, as is the case with the DAX or MSCI World, but also the company’s climate protection or labor rights record. The effect can then be demonstrated in detail. In the case of ETFs tracking the corresponding indices, for example, the invested companies emit significantly less climate-damaging CO2.
What should investors look for when choosing an ETF?
Patrick Diel: Sustainable indices can be classified according to three investment styles. Negative exclusion is the oldest and most traditional method, which involves excluding certain companies or sectors from the investment universe. The most common exclusion criteria concern armaments, such as cluster bombs and landmines. The “best-in-class” investment approach focuses on companies that have a track record of outperforming their peers in terms of environmental, social and governance measures within their own sector. Thematic investing involves targeted investments in industries and companies that specialize in solving specific social or environmental problems, such as renewable energy production, drinking water treatment or micro-credit in emerging markets. Often, the indices also use combinations of these different approaches. In the case of Xtrackers’ ESG indices, there is both a negative exclusion of certain controversial sectors and a selection of the best-in-class according to specific environmental and climate protection criteria.
Can ETFs offer a way out of the zero interest rate dilemma?
Patrick Diel: It should be clear to everyone that, in times of permanent zero interest rates, the savings account is a guaranteed negative activity after deduction of inflation. ETFs can provide a gateway to higher-yielding alternatives in this area. Those who value interest income could turn to segments that still offer appreciable yields today, such as ETFs on corporate bonds or international government bonds. Here, of course, the differences with the savings account must be taken into account, as ETFs can fluctuate. Ultimately, medium- and long-term investments in particular offer the possibility of additional returns compared to a non-interest-bearing savings account. Adding equity ETFs can also make sense over the long term. By investing in broadly diversified indices such as the MSCI World, which currently includes the 1,600 largest stocks from all the major industrialized countries, investors participate in the economic development of the global economy as a whole. The risk of an individual stock plays little role here. Long-term trends such as population growth and the rising disposable income of the middle class in many countries argue in favor of global economic growth – despite all economic cycles.
What should investors pay particular attention to when building an ETF portfolio?
Patrick Diel: First and foremost, it’s important that the portfolio matches your investment objectives, risk tolerance and investment horizon. Although tempting, the specific ETF should not be at the beginning of the considerations, so that we can then think about how the product fits into the portfolio. To begin with, it needs to be clarified whether long-term investments, i.e. of more than ten years, are to be made, and whether the capital can effectively remain intact over this period. In this case, a high quota of equity ETFs may make sense. If the investment horizon is significantly shorter, or if there is a likelihood that some capital will be needed before then, the equity quota should be reduced accordingly. ETFs on government or corporate bonds could be included instead. Before choosing a specific ETF, considerable time should be spent selecting the index best suited to your investment objectives. When selecting a specific ETF on this index, care should be taken to select an established provider with a wide range of products. In this case, there are also enough trading partners (market makers) available on the exchange to ensure permanent liquidity. Finally, it should be an ETF with a higher volume, which also indicates good tradability.
finanzen.net : The number of ETF savings plans in Germany has more than tripled
Patrick Diel: Yes, I’m convinced. The fact that ETF savings plans are already being used by many banks to attract customers is a good indication of this. Today, a wide range of ETF savings plans are used to attract customers in much the same way as an interest-bearing sight deposit account used to be. The range of ETF savings plans has expanded by leaps and bounds in recent years, and all asset classes and segments can now be covered, from equities to bonds to commodities. Sustainable or thematic ETFs can also be invested via savings plans. With some providers, it is also possible to subscribe to a savings plan free of charge. Xtrackers indicates on its website for each ETF which bank or online broker offers this product as a savings plan, and at what cost.
The long-term nature of a savings plan makes ETFs the ideal instrument for savings plans, due to their favorable cost structure, broad diversification and wide choice of investment options. For this reason alone, and thanks to increasingly powerful digital distribution channels, I believe in the uninterrupted growth of ETF savings plans.
Many of the indices tracked by ETFs have been around for a very long time.
Patrick Diel: The combination of established indices and strong innovation makes the ETF segment particularly interesting. On the one hand, there are indices with a history that sometimes spans several decades. On the other, new concepts are constantly emerging. We’ve already talked about ESG indices, which enable systematic, sustainable investment. Another example is thematic investing. These are new types of index concepts in which stocks are selected that are expected to position themselves favorably in certain investment themes in the future. This is a completely new approach. In the case of conventional index concepts, it is necessary to examine which key figures achieved in the past are relevant to an assessment. Forward-looking thematic indices try to determine which companies have acquired promising knowledge in future fields by sifting through patent databases with the help of artificial intelligence. This is the approach taken by the Xtrackers Artificial Intelligence & Big Data UCITS ETF, for example.
