ETFs. It's Simple But Not Easy.

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Having been familiar with stock markets only from movies such as the Wolf of Wall Street or friends who visited a stockbroker’s house to find it full of TVs that are showing Bloomberg in every room, I thought that it wasn’t for me as I did not want to follow the news 24/7 and frantically buy or sell stocks when there is a development. Luckily, there is a way how to invest in the stock market where I don’t have to do that. It is a simple idea but not so easy to carry out (“Simple but not easy” is a term coined by Warren Buffett).

In school, we did not have any subject that related to finance (or taxes or real life for that matter). In university I took some corporate finance and investment classes, but they were not much use for personal matters (apart from getting such concepts as discounting or compound interest).

After university I had no clue and it did not matter very much because I first had some student loans to pay which took me some time. After that, I started to wonder if there were any way to save some of the leftovers which were not consumed by debt repayment anymore.

First, I started to read books on Warren Buffett’s life and philosophy and really liked the idea of value investing. However, I realised that you still need to invest very much time into that and have great industry knowledge (Buffett reads about 800 pages per day, just to give you an idea). However, for ordinary people he suggested to invest most of one’s money into index funds.

ETFs - The Easy Part

I read a few books (probably around ten) on the topic of exchange traded funds (ETFs) (and related topics such as retirement saving, financial independence, etc.) to understand what advantages they hold for a non financially-obsessed person. The only useful one’s are index ETFs. I will use the term ETFs to mean index ETFs from now on. Index ETFs just replicate an index such as S&P 500 or MSCI World. How does that work? Let’s say Apple has a market value of roughly 900 billion USD at the time of writing and that is about 3.8 percent of all companies in S&P list of 500 companies. The index would then also buy for 3.8% of its money Apple stock. And that would happen for each company in the index in the same way until the index fund is a mirror to the underlying index.

Advantages include:

  • You don’t need to follow stocks and news excessively, you can look at your ETFs once a quarter or more seldom and restore the original percentage allocation of the 3-5 ETFs you picked.
  • You don’t need to worry about people selling you bad stocks or funds because they get a higher commission for them.
  • You don’t need to worry about fund managers (underperformance, high transaction costs and fees).
  • ETFs don’t get too big because they are the market and don’t need to try to beat the market (which usually fails).
  • ETFs usually have very low annual costs, which means you get to keep more of the returns.

There are many more arguments that favour ETFs to actively managed funds so my decision was set to get those and invest some savings into them.

Basically, all that was left to do was to pick a combination of some Vanguard ETFs and indirectly hold stocks in several thousand companies worldwide.

That can’t be so hard, can it?

ETFs - The Hard Part

American books are giving you the right concepts but are not really practical for a German because we don’t have those handy Roth IRA and 401(k) funds that are tax deferred. Also, we were until recently not able to buy any of the everywhere praised Vanguard funds in Europe. I was not sure if the more concrete suggestions in the US books are transferable worldwide (Buffett suggests to invest 90% of one’s savings in the S&P 500. But is that good for a European?).

Given that, I had a lot of reading to do that was related to Germany. Luckily, there were some German books (basically one that stood out by Gerd Kommer) that gave me some insight. Further there was a lot of helpful reading in the German Finance Reddit and in the Wertpapier-Forum.

Given all those readings, I decided to keep it as simple as possible and invest in the following allocation (the Vanguard funds weren’t available at that time) that promises to give me a globally diversified portfolio.

  • 50% MSCI World
  • 30% MSCI Emerging Markets IMI
  • 20% Euro Stoxx

You might ask questions about whether a globally diversified portfolio is better than just the S&P? Different authors argue for different things. There are too many things I feel “I don’t know the right answer” about. I have no real way of knowing if that is a good allocation or not and will just see maybe 10-20 years down the road if that was a good choice.

ETFs - The Really Hard Part

Now, getting to an allocation not easy, but not the most difficult part for me. The really hard part I will call “the German part” as that often fits. The really hard part is to pick concrete stocks for the index of your choice. MSCI world is emitted by at over dozen stock companies. All of them have different characteristics that include

  • Total expense ratio (TER): The TER is the annual cost that ranges from 0.15% to 0.6%.
  • Tracking difference: When reading enough, one learns that this is the real performance matter. Better start obsessing about that.
  • Is the fund accumulating or distributing the dividends? What do I need? How does that relate to the German laws?
  • Fund size: What should be the lower limit? Is 100 million large enough or should it rather be 500 or more?
  • Replication method: What is the difference for me if I chose a physically replicating ETFs over a swap one? What are the tax consequences?
  • Country: Does it matter where the fund is located? What are the tax implications?

As if there weren’t enough trade-offs to make (e.g. a fully replicating fund is usually more expensive and has a higher tracking difference than a swap-based one but is probably more safe in an event of a financial crisis just to give one example), under the old German laws, some ETFs made your annual tax report a nightmare (Steuereinfachheit for the short German term), so it was also something to avoid.

For this, there were no definitive answers which one is the best either. Every forum discussion rather leaves you with more options to consider than you had before.

For instance, it is not clear how important that actually is to optimize very hard for each metric because if you earn 7.9 or 7.8 percent in a given year might matter less than not being able to make a decision and keep the money on your bank account that gives you about 0% return.

Taking a leap of faith, I took the db-xtrackers MSCI World ETF (50%), ComStage Emerging Markets (30%) and the iShares Stoxx Europe 600 (20%).

Are that the right choices? Don’t know for sure.

The German tax reform that came into effect in 2018 made some changes in taxation that made things easier. There seem to be no “tax-ugly” (steuerhässliche) ETFs anymore. There are also changes related to ETFs that made swaps less attractive (though it is not finally clear yet).

The db-x trackers and the iShares Stoxx Europe seem fine for now, but I think I will not invest further into the ComStage swap but rather replace it with another iShares Emerging Markets IMI.

ETFs - The Untold Part

Many of the books I read recommended using ETFs as retirement vehicles. Save 10-30% of your income and you will retire richly. ETFs will give you good returns and compound interest will do the rest. Sounded good to me when I started reading those books.

However, there are flaws with that. Some I saw through my thinking: Even if save that percentage for ever, I don’t think there will ever be a way for me to retire any earlier than in 40 years. And god knows what will even be in 1 or 5 years. Further, if I have a family (or my parents) to support, I don’t think I would even be able to save anything.

The Fastlane book by MJ DeMarco rubbed some more salt into the wound. Retiring on 10% invested savings into the stock market of your salary is just a game of hope.

  • You hope that you don’t get laid off.
  • You hope that you get a pay raise.
  • You hope that you don’t get sick which would make it impossible to work.
  • You hope that the stock market returns are high.
  • You hope that there is no bubble that eradicates half of your savings in a day

If you want to save more, you start living the frugal life and make trade-off. Live becomes essentially about what you can’t buy or have or do.

And if in the unlikely event all the bad things do not happen, you might retire with a million, but you will be already old and maybe even in a wheelchair. So basically you don’t enjoy your youth and adulthood and can’t enjoy your retirement because you are too old.

There simply too many things that you can’t control or leverage to trust only on that ETF plan.

In a different post, I will depict in more detail what he proposes to do instead. However, that is not to say that ETFs are not great. Passive income is always awesome and if want to get it from the stock exchange, it’s better to use ETFs than other vehicles.

But it should maybe not be the only way to accumulate (and accelerate) your wealth from zero. Compound interest really starts to pay well in the second half of the chessboard. Think about other means to get there first, then use it’s power to support your lifestyle.


While ETFs make investing and getting good returns in the stock market more simple and accessible, the really hard part is in the details. However, while the upfront effort is high, you don’t have to think about it very much for the decades to come, which makes things easier and a good enough investment vehicle. However, one can dive endlessly in detail and never come to a decision because there is just too much information out there.

Lastly, ETFs are not the panacea to all wealth accumulation and retirement problems as there is still too much outside of your control.

Keeping that in mind, I wish you a happy and safe investing.