The Strategist

Three ways to profit from German economy

08/21/2017 - 14:33

Germany is the main economic force of the European economic community. The country is one of the world's leading exporters, has strong ties with the US and other trading partners, and leading German companies, many of which have the upper hand in their fields, are well-known to investors. Investing in the German economy is quite simple, and there are several ways to do it. Here are the most popular ones.
Direct investment in the German stock market

Direct purchase of shares on German stock exchanges for a foreign investor is rather complicated since many brokerage companies do not offer such services at all. However, there is at least one brokerage company in the US that allows its investors to directly invest in shares quoted on stock exchanges in key financial centers such as Frankfurt and Stuttgart, as well as in intra-European exchanges that have German units. Perhaps it will become easier in the future, but rather for citizens of other EU countries, than for residents of other states, so today it is better to look for other ways.

Shares of German companies on US stock exchanges

Shares of many large German companies are quoted on US stock exchanges. To do this, the company must pay only the relevant listing fees on the New York Stock Exchange or Nasdaq Stock Exchange and comply with the US securities laws relating to disclosure of financial information. Many German companies use American depositary receipts or shares to align foreign listing with their capital structure. For the investor, the main advantage of this option is that the United States exchanges offer mostly leading German companies. There is a simple explanation: the very attempt to get a listing in the United States reflects intention of a German company to maximize access to capital, and this shows that the business seeks growth more than an average enterprise. On the other hand, if you rely solely on such shares, you can miss a lot of promising options, especially among small companies. However, US listings are a great starting point for conservative investors who are targeting blue chips.

Exchange funds

There are a number of exchange-traded funds, oriented to German stocks, in the market. For example, iShares MSCI Germany Fund tracks shares of nearly 60 German companies operating in various sectors: consumer goods, financial sector, industry, minerals, medicine and information technology. The top three companies of the fund are medical company Bayer, technological giant SAP and industrial conglomerate Siemens, followed by financial companies, automakers and manufacturers of sportswear. Given the cost ratio of 0.5%, this is a relatively inexpensive way to invest in the German economy.

In addition to traditional exchange funds, there is a closed-end investment fund New Germany. It is focused mainly on the industry, which makes up about one-third of the portfolio. In addition, approximately 20% fall on minerals; the consumer and financial sectors are also well represented. New Germany Fund trades at a discount of almost 10% of the net asset value, but the maintenance is quite expensive - the expense ratio is 1.21%. In the past five years, profitability of German assets has been high, on average double-digit. So, if you are interested in adding German stocks to your portfolio, pay attention to the three ways described above.