The Definitive Guide to Investing in Germany
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.
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 AG, MAN SE, 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.
Benefits and Risks of Investing in Germany
Germany may have a robust economy, but its export-driven nature makes it susceptible to outside risk factors. For instance, the country's membership in the European Union has brought enormous advantages, but there are also some drawbacks to being part of such a large economic bloc.
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 $3.846 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.
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 and 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 they offer diverse exposure to companies domiciled within the country. But 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).
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 0.49% and a net asset value of $2.9 billion, as of September 2020.
Here are some more popular ETF options to invest in Germany:
- Global X DAX Germany ETF (DAX)
- The WisdomTree Germany Hedged Equity ETF (DXGE)
- The First Trust 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 SE (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.
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The World Bank. "GDP Growth (Annual %) - Germany." Accessed Sept. 9, 2020.
BlackRock. "iShares MSCI Germany ETF." Accessed Sept. 9, 2020.