finanzen.net: Mr. Diel, even though ETFs have been on the market in Germany for more than 20 years, not all investors are familiar with them. Your biggest advantage – transparent, simple, cheap – is also a disadvantage in the fund market in Germany, which is dominated by advisors. Can ETFs also be interesting for consultants and thus for private investors?
Patrick Diel: At least there is a lot to be said for it! ETFs are at the core of many institutional portfolios. Their positive properties, such as low costs and good tradability, also make them interesting for private investors. ETFs can also be advantageous for advisors, for example by switching to a flat-fee solution. This means that instead of the previous commission-based models, a uniform annual fee is charged, depending on the amount invested. If cost-efficient ETFs are used here, this can have a direct positive impact on the return potential. Another example: Due to their transparent structure, ETFs are being used more and more in unit-linked asset management, which consultants can use in their customer support. After all, ETFs are designed to cover the respective market as precisely as possible. This applies to rising markets, but of course also to falling markets.
finanzen.net: ETFs are standardized products, but many investors today attach great importance to sustainable investments that also include social or ecological criteria. Do ETFs also offer corresponding alternatives?
Patrick Diel: Yes, in recent years in particular, inflows into ETFs, which enable sustainable investments, have risen sharply. This is not surprising, because in principle ETFs are very well suited for this purpose. Basically, sustainable investment is about strict compliance with rules. The stocks or bonds selected must meet certain ESG criteria, i.e. environment, social and governance. These criteria can be taken into account very well when constructing an index. In detail, market capitalization is not the only decisive factor for weighting in an index, as is the case with the DAX or MSCI World, but the company’s behavior in terms of climate protection or compliance with employee rights. The effect can then be demonstrated in detail. In the case of ETFs that track the relevant indices, for example, the invested companies emit significantly less climate-damaging CO2.
finanzen.net: ETFs geared towards sustainability or ESG track very different indices. What should investors look for when choosing an ETF?
Patrick Diel: Sustainable indices can basically be classified according to three investment styles. Negative exclusion is the oldest and most traditional way of excluding certain companies or sectors from the investment universe. The most common exclusion criteria relate to armaments, in particular cluster bombs and land mines. The best-in-class investment approach focuses on companies that have historically outperformed their peers on environmental, social and governance measures within their own industry. As part of thematic investing, targeted investments are made in sectors and companies that specialize in solving specific social or environmental problems, such as the generation of renewable energies, drinking water treatment or microcredit in emerging countries. Combinations of the different approaches are often used for indices. The Xtrackers ESG indices include both a negative exclusion of certain controversial sectors and a best-in-class selection based on certain environmental and climate protection criteria.
finanzen.net: The majority of household savings in Germany are still in savings accounts and time deposit accounts without interest. Can ETFs offer a way out of the zero interest rate dilemma?
Patrick Diel: It should be clear to everyone that the savings account is a guaranteed negative business in times of permanently zero interest rates after deducting inflation. ETFs can bridge the gap to more worthwhile alternatives. Those who value interest income could look at segments that still offer significant interest today, such as ETFs on corporate bonds or international government bonds. Here, of course, there are differences to the savings account, since ETFs can fluctuate. The bottom line is that with medium and long-term investments in particular, there is a chance of additional income compared to interest-free savings. Adding stock ETFs can also make sense in the long term. With an investment in very broadly diversified indices such as the MSCI World, which currently bundles around 1,600 largest stocks from all major industrialized countries, investors are involved in the economic development of the global economy as a whole. The risk of a single value hardly plays a role here. Long-term trends such as population growth and the rising disposable income of the middle class in many countries point to growth in the global economy – despite all economic cycles.
finanzen.net: What should investors pay particular attention to when putting together an ETF portfolio?
Patrick Diel: Above all, it is important that the portfolio fits the investment goals, risk tolerance and investment horizon. Even if it is tempting, the specific ETF should not be at the beginning of the considerations in order to then consider how the product fits into the portfolio. At the start, it should be clarified whether the investment should be long-term, i.e. longer than ten years, and whether the capital can actually remain untouched over this period. In this case, a high proportion of equity ETFs can make sense. If the investment horizon is significantly shorter, or if there is a likelihood that part of the capital will be needed before then, the proportion of equities should be correspondingly lower. ETFs on government or corporate bonds could be included for this purpose. Before selecting a specific ETF, a lot of time should be put into selecting the index that best suits the investment goals. When selecting a specific ETF on this index, care should be taken to choose an established provider with a wide range of products. Because in this case there are also enough trading partners (market makers) available on the exchange who ensure ongoing liquidity. After all, it should be an ETF with a larger volume, which also speaks for good tradability.
finanzen.net: The number of ETF savings plans in Germany has more than tripled in three years to almost 1.75 million ETF savings plans as of June 2020. Will the growth continue?
Patrick Diel: Yes, I am convinced of that. A strong indication of this is that ETF savings plans are already being used by many banks to convince customers. A wide range of ETF savings plans is used today to approach customers in a similar way as an interest-bearing call money account used to be. The range of ETF savings plans has skyrocketed in recent years, and now all asset classes and segments can be covered, from stocks to bonds to commodities. Sustainable or thematic ETFs can also be invested through savings plans. With some providers it is also possible to conclude a savings plan without any fees. On its website, Xtrackers states for each ETF which bank or which online broker offers this product as a savings plan for which fees.
The long-term character of a savings plan makes ETFs the ideal instrument for savings plans due to their favorable cost structure, broad diversification and large selection of investment opportunities. For that reason alone and because of the increasingly strong digital sales channels, I believe in uninterrupted growth in ETF savings plans.
finanzen.net: Many indices represented by ETFs have been around for a very long time. So let’s look to the future: Are there any new trends that are being tracked by ETFs?
Patrick Diel: The combination of established indices and high innovative strength make the ETF segment particularly interesting. On the one hand, there are indices with a history that sometimes goes back decades. On the other hand, new concepts are constantly emerging. We have already spoken about ESG indices, which enable systematic, sustainable investments. Another example is thematic investing. This is about new index concepts in which stocks are selected that should be positioned advantageously in certain investment themes in the future. This is a completely new approach. Because with classic index concepts, it is considered which key figures achieved in the past are relevant for an evaluation. Forward-looking thematic indices attempt to use artificial intelligence to screen patent databases to find out which companies have built promising knowledge in future areas. This is how it works, for example Xtrackers Artificial Intelligence & Big Data UCITS ETF in front.
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patrick diel started his career in 2004 at Deutsche Bank in the Corporate Banking & Securities department, where he was responsible for supporting private banks in Germany for ETF & ETCs, systematic funds and structured products. Since 2013 he has been working at DWS for the sale of passive investments with a focus on asset managers, private banks, regional banks, family offices, asset managers and direct banks. In addition to passive sales to all wholesale customers, he has also been responsible for sales to all portfolio managers in Germany for active funds since 2019.