Finance

Smart investment or high risk?

Do you want to invest in shares of Adidas, Bayer and Daimler in one fell swoop? It’s child’s play with a Dax ETF. Read here how exactly such an index fund works and what risks it entails.

Everyone knows these headlines: “New record for the Dax”, “German leading index is recovering”, “Dax at historic level”. The German share index, or Dax for short, is always meant. This is important because in it the most valuable Germans Public companies are noted. In short: the Dax shows how the German economy is doing.

The good thing for you as an investor: You can also easily invest in the Dax – and thus benefit from the price gains. The cheapest way to do this is with a so-called Dax ETF. Here you can find out what it is, how you invest your money with such an index fund and what risks this can entail.

What is a Dax ETF?

To understand what a Dax ETF you need to know what the Dax is and what exactly an ETF is.

Dax: The Dax is the most important German share index. It lists the shares of the 30 most valuable German companies that are listed on the stock exchange. These are stock corporations such as Daimler, Deutsche Wohnen or Allianz. The Dax shows how the total value of these companies is changing.

ETF: An ETF is a special equity fund. An equity fund is a kind of basket, in which there is money that is invested – in shares, i.e. company shares. An ETF – also called an index fund – invests, as the name suggests, in the shares of the companies in an entire stock index.

In the case of a Dax ETF, a computer algorithm simulates the Dax. This is different from a conventional equity fund. There a manager determines which stocks the fund invests in. The decisive advantage of an ETF is its price: Since no manager has to be paid, ETFs are significantly cheaper than traditional equity funds – and often just as profitable, sometimes even more profitable.

A Dax ETF is therefore an index fund that replicates the Dax. With an investment in a Dax ETF, you are investing your money in all companies that are included in the Dax. This is how you benefit when the value of the 30 largest German listed companies increases.

Well-known DAX ETFs are, for example, “Amundi ETF DAX UCITS ETF DR”, “ComStage DAX UCITS ETF”, “iShares Core DAX UCITS ETF” or “Xtrackers DAX UCITS ETF 1C”.

But there are also ETFs that replicate the MDax, SDax or TecDax. These indices also belong to the Dax family and contain listed companies that are smaller than the DAX companies (MDax, SDax) or that are only active in the technology sector (TecDax).

What is the difference between accumulating and distributing Dax ETFs?

As with all ETFs, a basic distinction is made between two different types of ETFs: distributing and accumulating index funds.

Accumulating: Accumulating means that a Dax ETF is possible Dividends, i.e. part of the profit, the one Corporation pays out to the investors, does not pass them on to you as the investor.

Instead, this income is reinvested. This can be of interest to you as an investor because your investment capital increases without you having to pay in more money yourself. This has a particular effect on the so-called compound interest effect: the money you invest increases all the more when income that was previously generated is added.

Distributing: In contrast to accumulating ETFs, distributing ETFs pass on dividend profits directly to you as an investor. The advantage: You will get a certain amount of money transferred to your account on a regular basis. However – and this is the disadvantage – you benefit less from the so-called compound interest effect (see above).

How do I find the cheapest Dax ETF?

To find a suitable and affordable Dax ETF, you should compare several Dax ETFs on internet portals. It depends in particular on the Management fees. These are the costs a fund company charges for having you Funds offers.

These costs are often referred to in the “Total Expense Ratio” for short TER) summarized. In contrast to active funds, ETFs – and thus DAX ETFs – cost much less because there is no need to pay a manager who controls the purchase of shares (see above). The total expense ratio for a Dax ETF is around 0.08 to 0.16 percent of the amount invested – per year.

An example: At 0.16 percent and an invested amount of 5,000 euros, that’s eight euros a year. And the more money there is in a system, the higher the annual costs. So make sure you have a low TER when comparing ETFs.

You should also look to the Deposit costs Pay attention: Because in order to invest in a Dax ETF, you first have to open a securities account. You should therefore keep an eye on these fees. With many online providers and direct banks – in contrast to branch banks – there are no costs for a deposit.

Another expense is that Execution costs: When buying ETFs, so-called order fees are often incurred. These costs arise when a direct bank makes a specific purchase for you. This can be a fixed amount, for example 1.50 euros, or a percentage, for example 0.5 percent.

Dax ETF or individual stocks in an index? Which investment is better?

The clear advantage is: with a Dax ETF spread your risk much broader than with an investment in individual stocks. Because you invest in all 30 companies in the leading German index (see above) in one fell swoop.

However, investing in a Dax ETF is definitely more risky than investing in other ETFs. The reason: Compared to even larger stock indices, the Dax is not particularly large and balanced.

Specifically, many companies are listed in the Dax that are active in similar industries. For example, with BMW, Daimler, VW and Continental, four companies from the automotive industry are included in the Dax. With BASF, Bayer, Henkel, Merck and Fresenius there is also a focus on the chemical and pharmaceutical industry.

If the respective industries have problems, the Dax and thus also the performance of an ETF on the leading index can suffer. You should keep this in mind when investing.

A Dax ETF is therefore more suitable for investors who tend to want to take a higher risk. However, you can spread your risk more widely with one ETF on the MSCI World Index or the MSCI All Country World Index (see below).

Are DAX ETFs the right investment in a crisis?

If you already own shares in a Dax ETF, you shouldn’t sell them when prices fall. Because the past shows: in the long run, prices tend to rise again. If you sell your shares at a low on the stock market, you could make heavy losses.

However, if you do not yet own any shares in a Dax ETF, you could – after the prices have fallen – get cheap shares. It is particularly advantageous to invest your money with the help of an ETF savings plan, as you spread your investment capital over a longer period of time and do not run the risk of entering the stock market at the wrong time.

However, there are ETFs that are more widely diversified than a Dax ETF (see above). The most prominent example is an ETF that uses the MSCI All Country World Replicates index. This index contains the company shares of more than 2,700 of the largest publicly traded companies worldwide from almost 50 countries. An ETF on this index covers the entire global economy, including the emerging countries – and not just the 30 most valuable German stock corporations such as a Dax ETF.

How big would my assets be if I had invested 100 euros a month in a Dax ETF for 15 years?

You can not say this in global. Because it depends on the exact Dax ETF in which you would have invested the money. It also depends on the costs, which differ from depository or savings plan providers.

As an example, however, a long-term investment can be calculated based on the past price development of the Dax. Let’s assume that at the end of 2004 you started investing 100 euros in a Dax ETF every month with the help of a savings plan. At the end of 2019, you would have sold your shares in this ETF. Over this 15-year period, you would have given an average annual yield Return, of 7.9 percent achieved.

In this example, you would have a fortune at the end of 2019 33,713.52 euros achieved. Of which would be 15,713.52 income only, You would have paid in 18,000 euros over the years. Depending on the fees incurred (see above), you would only have to deduct the annual costs from this profit.

Attention: The average return over the past few years is no guarantee that this return will continue to exist in the future.

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