Updated May 22, 2023
Germany is the EU’s powerhouse. But multiple headwinds make investing in the country much riskier now.
We prefer combining FLGR with EWGS ETFs for plain-vanilla exposure to the overall German market. The former invests in mid and large caps, the latter – in small caps.
Other options include DXGE ETF if you want to hedge EUR currency risk or DAX ETF for only the biggest companies.
Is investing in Germany a good idea?
We do not consider Germany significantly attractive right now: it outperformed the USA in the short-term but faces significant headwinds longer-term.
German ETFs provided much better returns than the American S&P 500 Index during Q1 2023. The same happened in 2003-2012, but then fortunes changed during the following decade. We compared SPY ETF (with underlying S&P 500 Index) with EWG ETF (German mid and large caps) during the previous 20 years:
- Energy prices are much lower than last year, providing huge boost to businesses and consumers.
- Auto manufacturers increase production as supply chain disruptions and semiconductor shortages ease.
- Consumer confidence is rebounding.
- No more cheap Russian gas. Relying on the rogue country for the most critical supply was a risky bet. As Russia started new wars every 5-10 years, Germany was lucky to end the dependency before Nord Stream 2 became operational. But the advantage of the previous decades has disappeared.
- Ambitious green agenda risks de-industrialising the whole EU. With China and India continuing to use fossil fuels, Germany’s policy will not achieve much in terms of reducing worldwide CO2 emissions and could give Asian countries a significant manufacturing advantage.
- The possible reverse of globalisation. USA and China continue to distance themselves from each other and Germany could lose significantly from that.
Market Cap ETFs
There is no ETF covering the broad Germany market. As a result investors have to combine mid and large cap ETF with a small cap ETF to obtain broad exposure.
Mid and Large Cap
There are three ETFs:
- EWG – iShares MSCI Germany ETF;
- DAX – Global X DAX Germany ETF;
- FLGR – Franklin FTSE Germany ETF.
The main differences between EWG, DAX, and FLGR ETFs:
|Assets, mln USD||1783.6||36.4||18.2|
|Number of holdings||66||40||77|
|Market Cap||Mid, Large||Large||Mid, Large|
We prefer Franklin FTSE Germany ETF (FLGR) for mid and large companies. It has a much lower expense ratio and includes more mid-caps. Also, FLGR return was a bit better than EWG during the 2018-2022 period and the 2022 full year.
Global X DAX Germany ETF (DAX) is the only choice if you want to invest just in the 40 biggest public German companies.
Currently, there is only one such ETF – iShares MSCI Germany Small-Cap ETF (EWGS).
|Assets, mln USD||25.1|
|Total return, %|
Combining FLGR and EWGS provides all-cap exposure to the German market.
Currency Hedged ETFs
Currency-hedged German ETFs gave better returns during 2018-2022, but this could change any time if Euro will start to outperform US Dollar. Choose them only if you don’t want to have EUR currency exposure.
There are three ETFs:
- HEWG – iShares Currency Hedged MSCI Germany ETF;
- DXGE – WisdomTree Germany Hedged Equity;
- DBGR – Xtrackers MSCI Germany Hedged Equity ETF.
Their main differences are:
|Assets, mln USD||48.2||21.7||7.9|
|Factors and Themes||–||Dividend Yield, Export Tilt||–|
We prefer WisdomTree Germany Hedged Equity (DXGE) for a currency-hedged ETF. It includes only dividend-paying companies with heavier export tilt and provided better returns than the other two ETFs during 2018-2022, 2022 full year, and Q1 2023.
Growth and Value Factors
First Trust Germany AlphaDEX Fund (FGM) invests in 40 German companies, selected by Growth and Value factors.
|Assets, mln USD||14.0|
|Total return, %|
FGM underperformed other German ETFs during 2018-2022, 2022 full year, and Q1 2023.