Where do I buy index funds

Buy ETF - this is how you secure the best funds for your portfolio!

Buy ETFs - 7 reasons that speak for them

More and more investors are taking advantage of the opportunities for higher returns and are investing in ETFs, i.e. in index funds. The purchase is easy to carry out and can be done from the comfort of your home on the computer. There are seven good reasons to buy an ETF:

  1. An ETF is inexpensive because there is no fund manager to pay. That reduces the fees.
  2. An ETF has a transparent performance.
  3. ETFs achieve high returns.
  4. ETFs can be bought and sold on the stock exchange at any time, which is why they can be traded quickly and flexibly.
  5. ETFs are safe because they are protected in the event of the bankruptcy of the issuing bank or fund company.
  6. An ETF has a broad diversification of risk because it contains not just some, but all of the stocks in an index. This way, losses of individual stocks can be compensated.
  7. With an ETF savings plan, you can regularly invest in stocks with small sums from € 25 per month.

What is an ETF?

An ETF (exchange-traded fund) is a listed index fund that tracks the development of a specific index such as the DAX, Dow-Jones, S&P 500 or MSCI World. In addition, an ETF index fund is available in different industries, regions and asset classes. You can buy ETFs in sectors such as energy, healthcare, consumer goods and automobiles. The index fund can consist of global or regional stocks, bond funds, commodities or real estate funds. Classic equity funds, on the other hand, only display a selection of certain share packages and, unlike index funds, are controlled by a fund manager. Which is why there are higher fees when buying shares than when buying ETFs.

How can I buy an ETF?

Few things need to be considered when buying an ETF. First of all, to buy a fund you need a bank or an online broker through which you can process the ETF purchase. ETFs are traded on the stock exchange, but you cannot purchase the funds directly on the stock exchange. Only the bank or the online broker can do that. Therefore you have to give the order to your bank or your online broker. It's a simple process that you can do online from the comfort of your desk.

  1. Open a depot
  2. Select ETF and note down the key figure
  3. Fill out and confirm the online form from your bank or broker

Step 1: Open a securities account

A deposit is required for the purchase of ETFs. Because you can only buy and sell ETFs through the custody account. We'll show you tips on how to get a low-cost depot and which providers are suitable in our depot comparison.

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Step 2: Select ETF and note down the key figure

Next up is choosing an ETF in which to participate. A comprehensive overview of the ETFs available for purchase can be found at justETF.com and wallstreet-online.de. There you can select the funds according to various criteria. This includes, for example, the region to which the index shown belongs (Europe, Africa, Germany, worldwide) or the possible restriction to certain economic sectors such as the automotive industry or IT companies. There are also a number of other differentiators that you should keep in mind when looking for the best fund. The most important are:

  • the fund volume and thus the size of the ETF,
  • the current price at which the ETF can be bought,
  • the volatility, i.e. the fluctuations in the price,
  • Use of income, i.e. either the profit is paid out to you (distributing ETFs) or it is reinvested directly in the fund (accumulating ETF),
  • the amount of management fees.

Further selection criteria that you will encounter when buying an ETF are shown below in the text. Once you have found the best fund for you, make a note of its name and the corresponding key figure. This is either the ISIN (International Securities Identification Number) or the WKN (securities identification number). You need this to buy the ETF through your portfolio.

Step 3: Fill out and confirm the online form from your bank or broker

The buying process itself is straightforward. You go to the homepage of your custodian bank or your online broker and then click in the area in which securities are traded. There you enter the code of the selected ETF and you have to provide further information about your purchase. These include:

  • the trading center: Depending on the trading venue, i.e. the issuing exchange, the prices of the ETF can fluctuate slightly.
  • the order volume: Here you determine the amount that you want to invest. This results in the possible number of ETF shares at the respective price. Or you enter the number of items and the order volume is displayed.
  • the order limit: This sets an upper limit for your investment.
  • the validity: It describes when you want to make the purchase. Either on the current day or at a certain other date.

Depending on your broker's purchase mask, additional information may be added. When all the necessary information has been provided, you will usually receive a comprehensive overview of your ETF purchase. Finally, you have to confirm the purchase with a TAN procedure. You will receive a transaction number (TAN) from your bank, which you can use for approval.

ETF lexicon

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What are the fees for buying an ETF?

Your spending on trading ETFs is made up of two different areas. On the one hand, there are the fees that arise from your custody account and, on the other hand, the transaction costs that arise when buying and selling securities.

Depot costs

Some providers charge fees for managing a depot. If you want to buy ETFs, you should therefore prefer online brokers or direct banks that offer free custody accounts. Otherwise, fees of 30 € and more per year may be incurred. You can find out which costs per order are incurred by the individual providers in our depot comparison.

Transaction or trading costs

There are transaction costs when buying ETFs. These are made up of order fees and trading venue fees.

  • One of the costs when buying funds are the order fees that your bank or online broker charge for their work. These are usually composed of a fixed basic fee and a variable percentage per order. For example, if you pay a basic fee of € 4.95 per order and an additional 0.25% of the order amount, this makes a total fee of € 7.45 (€ 4.95 + € 2.50) for an order of € 1,000. Typically, the order fees decrease when you conduct a large number of transactions. There is then a volume discount. Or from a certain order size onwards, you only pay your bank a lower fee.
  • In addition, there are trading venue fees and the exchange fee. The trading venue fee is a flat rate of one to several euros that is levied by the respective stock exchange (e.g. Xetra, Boerse Stuttgart). The exchange fee is calculated as a percentage of the investment amount and is also paid to the respective exchange.
  • As a rule, these fees are already included in the prices of the banks when buying ETFs. Often banks and online brokers also offer over-the-counter trading in ETFs, in which case this fee is waived. This allows these ETFs to be issued more cheaply. However, not all ETFs can be traded over the counter.

Our tip: When buying ETFs, look out for flat-fee offers from banks and brokers. You will be offered a low-cost flat rate for trading ETFs in certain promotional periods. This allows you to carry out your transactions and thus save some of the usual fees.

How do I find the best ETF? - 6 tips

As is so often the case with an investment comparison, one cannot say here either: This is the best ETF that promises more profit than all others and is therefore to be recommended without reservation. Choosing the right ETF is a very individual decision, as there is a huge selection. We have put together 6 tips for you to help you find the best ETF and to make your decision for a particular ETF easier.

Tip 1: You need an investment strategy

An investment strategy helps you to find the right investment for you. With the help of the investment strategy, you can make a decision much more easily and quickly even with traditional investments: Which investment suits me better? Daily or fixed deposit? This is therefore essential for more complex investments such as buying ETFs. This is the only way to find out which fund you should invest in. Ask yourself the following questions:

  • What do I want to achieve with the ETF? Think about an investment goal, for example to make a contribution to your retirement savings or to save for a big trip.
  • How high can the risk be when I buy an ETF? If you are more of the risk-averse type, then low-risk ETFs are a better choice. If potential financial losses don't hurt you, you can also buy riskier ETFs.
  • How long can I do without how much money? Work out which investment amount fits your budget and how long you can do without the money or how long you need to achieve the planned investment goal.

When you have answered these questions for yourself, you can choose an ETF that suits your personal preferences and needs.

Tip 2: Large and broad-based ETFs are more likely to make a profit

The bigger an ETF is and the broader the fund, the better it is. In this way, losses of individual shares can be compensated for by the profits of the other shares on this exchange. That is why ETFs that track a comprehensive index are often recommended. These are for example:

  • The MSCI World, which contains stocks of 1,600 medium to large companies that operate worldwide.
  • The Stoxx Europe 600, which contains the 600 most important companies in Europe.

You should approach particularly risky and speculative variants of buying ETFs with caution. This includes ETFs that exclusively track emerging market indices. These are indices from countries with high growth rates such as Turkey or Russia. But short ETFs, which are traded short-term, mostly on a daily basis, and leveraged ETFs are also risky variants. With leverage, profits and losses of a security can be multiplied. These risky products require a lot of specialist knowledge and experience from the investor. Therefore, they are not particularly suitable for beginners.

Tip 3: watch out for differences in the cost of an ETF

For every ETF there is an indication of the TER (Total Expense Ratio), for example 0.30% or 0.25%. This number shows you by how many percentage points your annual profit is reduced by spending on fund administration. For ETFs, the TER is usually between 0.1% and 0.5%. That is significantly less than with traditional equity funds. Choosing an ETF with a low TER can lower your costs.

Tip 4: Winnings can be paid out or reinvested directly

As soon as you want to buy an ETF, you will come across the terms distributing and accumulating funds. This differentiates the way in which the fund distributes profits.

Distributing Funds

With a distributing ETF, the dividends generated are paid out at certain intervals (annually, quarterly or monthly).

  • Well worth it for investors who prefer a regular payout of profits.
  • In the case of German funds, the withholding tax is automatically paid to the tax office; in the case of foreign funds, profits must be declared in the tax return.
  • As an investor, you can decide for yourself whether you want to reinvest your profits or use them for other purposes.

Accumulating Funds

In the case of the accumulation fund, the profit is automatically reinvested in the existing fund. This increases their stake in the ETF and also increases their further income.

  • It is worthwhile for investors who want to build up assets over the long term and are not dependent on short-term profits.
  • Profits are automatically transferred to the tax office. Overpaid taxes can be claimed on the tax return when the fund is sold.
  • Even with little wealth, a good return can be achieved in the long term due to the compound interest effect.

Tip 5: Pay attention to the composition of the ETF

An ETF always tracks a specific index fund. A distinction is made between ETFs with direct compilation (physical replication) and ETFs with indirect compilation (synthetic replication).

What is a physical ETF?

In the case of physical replication (direct compilation), the proportion of the individual index values ​​is almost completely reflected one-to-one in the ETF. So it is a full replication of the index in the ETF. This means that if a particular stock makes up 10% of the value on an exchange, then the fund company will buy it in such a way that it also makes up 10% of the ETF.

What is a synthetic ETF?

On the other hand, there is synthetic replication (indirect compilation). This replicates the index of an ETF via a swap, in which the index is artificially replicated. The ETF provider enters into a contract with a SWAP partner. The SWAP partner, e.g. a bank, guarantees the ETF provider that a certain index return will be achieved. In the swap business, the ETF provider invests in a market from which the SWAP partner hopes to make good profits. The investment volume of a DAX-based ETF can, for example, be invested on the Japanese stock exchange in order to achieve the desired return. The return that the actual ETF achieves and the return on the investment are ultimately compared with one another and the difference is swapped between the partners. If the DAX ETF has generated a return of 5% and the investment on the Japanese stock exchange 3%, the SWAP partner pays the difference of 2% to the ETF.

Which is to be preferred - physical or synthetic ETFs?

Both variants have advantages and disadvantages. However, it is not possible to make a clear statement as to whether it is better to buy a physical or synthetic ETF. As always, this depends on your risk tolerance and investment knowledge. According to fund managers, synthetic ETFs are generally safe, but there is greater demand for physical ETFs among investors. For this reason, more and more ETF providers are preferring physical ETFs over synthetic ones.

  • The physical replication is easier for you as an investor to understand because you can better estimate which components (markets, sectors, commodities) are mapped in the ETF. In fact, however, it is more complex and costly to implement. What can be seen in the TER fees when buying an ETF. This can lead to a deviation in the actual index, the so-called tracking error. This is particularly problematic with broad-based ETFs such as the MSCI World, as investments can only be made in a large proportion of the funds that make up the ETF. A 100% replication of the index is therefore not possible.
  • Synthetic ETFs, on the other hand, are cheaper and can better track the index, as they do not have to contain all the relevant securities in the fund. In addition, niche markets or certain raw materials, for example from emerging countries such as India, can only be bought cheaply via synthetic ETFs. However, a possible insolvency of the SWAP partner creates a counterparty risk. In the event of bankruptcy, the price of the ETF would fall sharply. However, the risk is low and limited to 10% of the fund's assets.

Tip 6: A high fund volume offers more security

The lower the overall volume of the ETF, the more likely it is that the index fund will be closed for economic reasons or merged with other funds. Therefore, when buying an ETF, you should pay attention to the volume. For funds with a volume of more than 100 million euros, the risk of closure is very low. That is why experts recommend investing in funds with a volume of at least 100 million euros.

Checklist: How to Find the Best ETF

  • The ETF should suit your personal investment strategy.
  • Make sure that the ETF you want is broad.
  • For beginners, the rule is: Stay away from risky ETF variants.
  • Fund administration costs should be as low as possible.
  • You need to know whether the winnings will be paid out or reinvested straight away.
  • Make sure that the fund is physically composed with the original shares or synthetically with third-party shares.
  • Invest in ETFs with a large fund volume of over 100 million euros.

When is the best time to buy ETFs?

When you can buy or sell ETFs depends on the trading venue you choose. There are three different groups for trading venues:

  • the floor exchanges, e.g. the Stuttgart, Munich or Frankfurt stock exchanges
  • electronic trading, e.g. XETRA, EUREX or NASDAQ
  • OTC trading, e.g. Tradegate and Lang & Schwarz
Opening and trading hours of the individual exchanges

Depending on the trading venue, there are different opening and therefore trading hours. You can buy ETFs at the Stuttgart Stock Exchange from 8:00 a.m. to 10:00 p.m., while the Munich Stock Exchange has shorter opening times from 8:00 a.m. to 8:00 p.m. Electronic trading via XETRA is only possible between 9:00 a.m. and 5:30 p.m.

You can also buy ETFs that are not traded in Germany on foreign exchanges during normal trading hours there. For example in Shanghai or Tokyo. However, there are higher fees than in Germany.

If you want to trade ETFs outside of the opening hours of the stock exchanges, you can use over-the-counter trading. There are also online platforms such as Tradegate and Lang & Schwarz. The low order fees are an advantage here. However, you have to reckon with worse prices compared to trading on the stock exchange.

An ETF savings plan as a cheap and simple alternative to buying ETFs directly

You don't have to buy a single ETF, you can also participate in an ETF savings plan. This is a particularly simple form of investing in ETFs that many banks and online brokers offer. With an ETF savings plan, you regularly invest in ETFs over a certain period of time with low deposits. The benefits include:

  • You can already invest small amounts of € 25 per month.
  • You can cancel the savings plans at any time and increase or reduce the savings rates.

Correctly assess the risks involved in buying an ETF

There are many advantages to an ETF. Nevertheless, there are risks associated with investing in these index funds. After all, it is a fund that consists of various stocks. And the value of stocks is subject to price fluctuations. The price of individual stocks that are important for an index, as well as the value of the entire index, can collapse. This is then associated with losses for you as an investor.

However, it is advisable not to sell the securities at the first signs of a bad phase. In many cases the market will recover. A good example of this is the German DAX share index. In the past 10 years there have been significant fluctuations in the opening price from 8,101.89 points (on July 10, 2007) to 3,699.33 points (March 6, 2009) up to 13,559.60 points (January 23, 2018). In July 2020 it was over 12,000 points, whereas it was around 8,500 points at the beginning of the Corona crisis in March. The examples show that it can be worthwhile not to sell securities when prices are bad, but rather to sit out this phase and wait for better prices.

Risks from bankruptcies and exchange rate fluctuations

A further risk arises with synthetically (indirectly) composed ETFs. The fund company then works with an exchange partner. This can be a bank, for example. This bank guarantees the value of the ETF. Should it fail, the entire ETF could be at risk. However, this risk of loss is low and limited to 10% of the fund's assets.

There is also a risk with ETFs that are listed in foreign currencies. This also includes the MSCI World ETF, which is managed in dollars. If the exchange rates between the euro and the dollar worsen, it can happen that these exchange rate fluctuations reduce the value of your investment. This can happen if you want to buy your securities at a high euro rate and sell them with a bad euro rate.

Classification into risk classes gives an indication

If you want to buy an ETF and don't know which is the best ETF for you, specifying the fund's risk class can help. Each fund is divided into one of five risk classes by its provider.

Risk classdirectionrisk
1safety-orientedlow
2profit-orientedmoderate
3growth orienteda little bit higher
4risk-orientedabove average
5speculativeunlimited

The corresponding risk class is specified in the product information sheets or in the factsheets of the ETFs. However, there is no legal requirement or guideline for the assignment to individual risk classes. The providers of ETFs make the classification themselves. Nevertheless, it can give you an indication of the possible risk of your investment when choosing an ETF. If you are uncomfortable with a high risk, then you better go for a lower risk.

In addition, according to the German Securities Trading Act (WpHG), financial institutions are obliged to carry out an appropriateness test as part of customer advice. Customers are asked about their experience, knowledge and understanding of the capital market. When buying securities via an online bank, a warning must be placed on the homepage to warn of the risks involved in trading stocks and funds. This is to ensure that customers are aware of the existing risks.

Tax treatment of ETFs has become easier

There are many different factors to consider when taxing ETFs, such as:

  • In which country is the ETF launched?
  • Are the winnings paid out regularly?
  • How is the fund composed?

The tax treatment of ETFs was therefore considered to be quite time-consuming and complicated. On January 1, 2018, new regulations came into force within the framework of the Investment Tax Reform Act. The aim is to harmonize the tax treatment of the various ETFs and at the same time to simplify the filling out of the tax return.

Please inform yourself about the payment of the flat tax and the advantages of an exemption order from your tax advisor.

Robo-advisors can provide good support when choosing and buying ETFs. These are digital programs that support customers in financial matters. For example, they recommend individually suitable ETFs and can even manage your entire investment. This is particularly useful for inexperienced investors who need help with their investment strategy.