Investing in Germany
Germany's ETFs Offer Opportunities
Germany is the largest economy in Europe and the fourth-largest economy in the world. Driven by industrial production, the country exports more than any other country besides China and the U.S., and its trade surplus consistently competes with China's. The country also houses dozens of the world's 500 largest publicly traded companies, which makes it an important country for international investors.
Interested in investing in Germany? Learn the benefits and drawbacks of Germany ETFs and ADRs, two popular types of investment products.
Germany's largest companies can be found in the DAX 30 Index, which is similar to the Dow Jones Industrial Average in the United States. It contains the 30 largest German companies by market capitalization trading on the Frankfurt Stock Exchange. The index contains some household names like Adidas AG, BASF SE, BMW AG, Bayer SE, Siemens Energy AG, and many others.
The country also has significant natural resource reserves, including uranium, timber, potash, nickel, copper, and natural gas. As for renewables, the country is one of the world's largest producers of wind turbines. In 2019, renewables eclipsed coal to become Germany's primary source of power. By 2030, the country plans to generate 65% of its energy from renewables.
Exports account for over half of sales in many of Germany's strongest sectors, including automotive manufacturing, medical technology, chemicals, and mechanical engineering.
Benefits of Investing in Germany
Germany offers investors several advantages due to its economic power and stability. The benefits of investing in Germany include:
- Strong economy: Germany has one of the most robust economies in the world, both in terms of size and exports. In 2019, the country's gross domestic product (GDP) reached $3.861 trillion.
- European Union membership: Germany has benefited strongly from inclusion in the European Union, which has helped it become more competitive against other industrialized countries and other members of the Eurozone.
- Workforce and taxes: Germany's workforce is highly educated and, compared to other EU countries, they go on strike less often. The country's unified tax code and business-friendly policies are also favorable for publicly traded companies.
Risks of Investing in Germany
Germany may have a robust economy, but its export-driven nature makes it susceptible to outside risk factors. The risks of investing in Germany include:
- European Union bailouts: Germany has benefited from being a member of the European Union, but sovereign debt problems, such as the European debt crisis that peaked between 2010 and 2012, have forced it to participate in bailouts.
- European contagion: Countries in the European Union are connected via sovereign debt issues. A failure of one country to pay its debt could lead to others facing a similar fate and ultimately hurt Germany's balance sheets (and those of German banks).
- Demographics: Germany has an aging population that may place an increasing burden on its social welfare programs. With a fertility rate of 1.57 in 2018, the country leads many others in the West but still falls far below the natural replacement rate of 2.1. However, high immigration rates—like those that came with the beginning of the European migrant crisis in 2015—could help stabilize these programs.
- Slowing economy: Germany's GDP shrank from 1.52% in 2018 to 0.56 in 2019. There are multiple reasons why this happened, including global trade concerns that have slowed down many economies, so Germany isn't facing this risk alone. However, the slumping GDP is still a risk worth noting, as are rising tariffs—which will likely have an impact on the export-heavy country.
Invest in Germany With ETFs
The easiest way to invest in Germany is through exchange-traded funds (ETFs). These securities can be purchased on U.S. stock exchanges and they offer diverse exposure to companies domiciled within the country.
The most popular ETF used to invest in Germany is the iShares MSCI Germany Index Fund (EWG), which is managed by BlackRock's iShares group. Using the popular Germany MSCI Index, the fund holds more than 60 stocks across more than 10 industries, with an expense ratio of 0.51% and a net asset value of $2.65 billion, as of March 2021.
Here are some more popular ETF options to invest in Germany:
- WisdomTree Germany Hedged Equity ETF (DXGE)
- First Trust Germany AlphaDEX Fund Profile (FGM)
- iShares Currency Hedged MSCI Germany ETF (HEWG)
- iShares MSCI Germany Small-Cap ETF (EWGS)
- Global X DAX Germany ETF (DAX)
When investing in international ETFs, traders should be cognizant of the expense ratios of the funds, which can vary quite a bit between funds.
Some funds may also be overly concentrated in one area of the economy, which can introduce diversification-related risks.
Invest in Germany With ADRs
American depositary receipts (ADRs) offer a more hands-on way to easily invest in individual companies without buying and selling stock on non-U.S. exchanges (which comes with added barriers, fees, and taxes). An ADR is a certificate that entitles the owner to a share or shares of stock in a foreign company.
Here are some popular ADRs to invest in Germany:
- Deutsche Bank AG (DB)
- Deutsche Telekom AG (DTEGY)
- Siemens AG (SI)
- BASF SE (BASFY)
- E.ON SE (EONGY)
When investing in ADRs, traders should take into account the lower levels of liquidity compared to typical domestic blue-chip stocks. Lower levels of liquidity could make it more difficult to buy and sell shares at favorable prices.
There may also be tax implications associated with ADRs and foreign stock.
The Bottom Line
Investing in Germany ETFs and ADRs allows American investors to put their money into Germany's largest companies. ETFs and ADRs each have their benefits and risks. ETFs are the easiest way to invest in German companies, while ADRs allow indirect ownership of stock. Investors should make themselves aware of expense ratios, tax implications, and other factors.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.