The Definitive Guide to Investing in Germany
How to Invest in Europe's Largest Economy
Germany is the largest economy in Europe and the fourth largest economy in the world. Driven by industrial production, the country is the third largest exporter and maintains the highest trade surplus in the world. The country also houses nearly 40 of the world's 500 largest publicly-traded companies, which makes it an important country for international investors.
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, and contains the 30 largest Germany 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 AG, MAN SE and many others.
The country also has significant natural resource reserves, including uranium, timber, potash, nickel, copper, and natural gas. In terms of renewables, the country is also the world's largest producer of wind turbines and generates nearly a third of its domestic power from renewable sources.
Benefits & Risks of Investing in Germany
Germany may have a robust economy, but it's export-driven nature makes it susceptible to outside risk factors. For instance, the country's membership in the European Union has been an enormous advantage in the past, but the European sovereign debt crisis and the subsequent economic slowdown has had a negative impact on its economy.
Benefits of investing in Germany include:
- Strong Economy - Germany has one of the most robust economies in the world, as the fourth largest in size and second largest in exports. In 2017, the country's gross domestic product (GDP) reached $3.65 trillion on a nominal basis.
- European Union Membership - Germany has benefited strongly from inclusion in the European Union, which as helped it become more competitive against not only other industrialized countries, but also all other members of the Eurozone.
- Workforce & Taxes - Germany's workforce is both highly educated and highly driven, as evidenced by higher education percentages and strike days per 1,000 inhabitants. And the country's unified tax code and business-friendly policies are also favorable.
Risks of investing in Germany include:
- European Union Bailouts - Germany has benefited from being a member of the European Union, but sovereign debt problems have forced it to participate in bailouts in the past. These bailouts may have high costs, especially if more countries face problems.
- European Contagion - Countries in the European Union are connected to each other 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 (and its banks') balance sheet.
- Demographics - Germany has an aging population that may place an increasing burden on its social welfare programs. With a fertility rate of 1.45 in 2010, the country leads many others in the West, but is far below the natural replacement rate of 2.1.
Invest in Germany with ETFs & ADRs
The easiest way to invest in Germany is through exchange-traded funds (ETFs). These securities can be purchased on U.S. stock exchanges and offer diverse exposure to companies domiciled within the country. But American Depository Receipts (ADRs) offer a more hands-on way to easily invest in individual companies without buying and selling stock on non-U.S. exchanges.
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 around 50 stocks across more than 10 industries, with an expense ratio of 0.49% and a net asset value of more than $4 billion, as of February of 2018.
Here are some popular ETFs to invest in Germany:
- iShares MSCI Germany Index Fund (EWG)
- Germany Bond Index Fund (BUND)
- ProShares Germany Sovereign/SubSovereign (GGOV)
- Market Vectors Germany Small Cap ETF (GERJ)
- Germany AlphaDEX Fund Profile (FGM)
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 AG (EONGY)
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.
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.