Seven things you need to know about ETF savings plans

September 2, 2020  |  Nicolas Zeitler
Asset_7Q&A Blog 1600
An ETF savings plan is the easiest way to invest broadly in the stock market, even with small amounts. If you want to find out the biggest advantages on ETF savings plans, keep reading!

1. Why invest on an ETF savings plan at all?

The US stock index S&P 500 has risen by 38 percent since its lows at the end of March. The price of the leading German index, the DAX, has even risen by 50 percent. Will the rally continue or will the next setback come soon? If you ask yourself this question, you run the risk of permanently standing on the sidelines instead of investing. An ETF savings plan frees you from the search for the ideal entry point: instead of investing once, you regularly invest a certain amount with a savings plan. You buy ETF shares sometimes at higher, sometimes at lower prices. The fear of entering at "too high a price" need not plague you.

With its regularity, an ETF savings plan also anchors saving and investing in your life. Because the instalment is automatically withdrawn from your account at a fixed time each month, you do not spend the money elsewhere. And you gradually build up assets without having to actively think about it. On top of that, an ETF savings plan eliminates the need to select individual securities. An ETF tracks the performance of an entire basket of securities, for example the MSCI World stock index with more than 1,600 securities from 23 industrialised countries. You can invest in such a basket via an ETF with double-digit monthly instalments. If you were to invest in individual securities, you would not be able to build up such a broadly diversified portfolio with low amounts. With an ETF savings plan, you save yourself the effort of evaluating and observing individual securities, and you automatically follow one of the most important basic rules of investing: to spread the risk broadly.

2. Is a savings plan better than a one-off investment?

Whether an ETF savings plan is superior to investing a larger sum at once or vice versa cannot be answered across the board. Both are good for different purposes. If you suddenly have a large amount of money at your disposal, for example after selling a house or through an inheritance, in most cases it is better to invest it all at once instead of investing it in instalments. The reason is that you then participate in the long-term upward trend on the stock market with the entire sum over a longer period of time.

A savings plan, on the other hand, is suitable for investing the money you can set aside each month in an uncomplicated way. If you are a newcomer to the stock market and invest a large chunk of your savings in one lump sum for the first time, and then regularly increase your assets via a savings plan and invest large sums in their entirety again on later occasions, you will benefit from the advantages of both investment options.

3. How exactly does an ETF savings plan work?

One essential question you need to answer in advance is: How much do I want to invest each month? The upper limit is determined by what amount you have left regularly after deducting all expenses. Apart from setting the rate and setting up the savings plan, you don't have to do anything. You don't have to worry about trading times on the stock exchange, nor do you have to think about investing every month. The instalment is withdrawn from your reference account on a specific date and then automatically invested in ETF shares for you. You should therefore always have at least the amount of your instalment in your account on the collection date. The price of an ETF share is not important to you because when you invest your instalment, fractions of ETFs are also bought if necessary. Your ETF savings plan runs until you deactivate or change it.

4. Which ETF should I invest in via a savings plan?

You have plenty of design options. You can invest purely in shares via an ETF savings plan. The easiest way to achieve broad diversification is to save for an ETF on an index such as the MSCI All Country World Index (ACWI) or the MSCI World. Alternatively, you can choose ETFs on individual markets, such as the American S&P 500 or the DAX. You can also conclude several savings plans and thus compile a portfolio with a country weighting of your choice. To make your choice of ETF easier and to find the right one for you, we invite you to use the ETF screener on justETF.com.

If you invest only in equity ETFs, your portfolio is fully exposed to the fluctuations on the stock markets. To cushion these, ETFs on bond indices can be added. As a rule, bonds are less volatile than equities. In addition, bonds tend to bring positive returns in market phases in which share prices fall.

5. What to do if there is no money for the savings plan instalment?

An ETF savings plan should be flexible enough that you can easily adjust it to your financial situation: If you spend more than usual and the budget is tight, lower the savings plan rate or suspend the savings plan. As soon as your bottleneck is overcome, increase the rate or set up the suspended savings plan again. If your margin increases, for example due to a salary increase, you can increase the rate. As a Scalable Capital customer, you can enter any change with just a few clicks via web access or in the app. It will take effect with the next execution. Adjustments to a savings plan are free of charge with us.

6. How much does a savings plan cost?

Make sure you don't pay too much for your savings plan. Because order costs reduce your return. If your bank charges 1.50 euros per execution, that's six percent of the invested sum for a savings rate of 25 euros. In absolute figures, you can lose almost a four-digit amount in 20 years due to order costs of 1.50 euros: If you had instead invested the money in the DAX via a savings plan, which in the past has yielded an average annual return of 8.8 percent over an investment period of 20 years, you would end up with 984 euros more in your securities account. (Note: Neither past performance nor forecasts are a reliable indicator of future performance). In the best case, your broker does not charge any fee per execution. Then you can also run several ETF savings plans side by side at no extra cost.

An ETF savings plan in the Scalable Broker does not cost you any money. Create savings plans with small savings amounts starting at €1 and choose from over 2,000 ETFs.

7. What should I do if I need the money again?

You can sell your ETF units at any time. If you need a larger amount for a one-off purchase, you can liquidate part of your portfolio by selling it. An existing savings plan will continue to run. If you want to liquidate your portfolio, for example to draw on your assets in retirement, you can stop the savings plan and sell your units all at once or in tranches. As with the savings plan, it is worth taking a look at the costs: if your bank charges fees per trade, these add up when you sell in stages. If your broker charges only low or no costs per order, the gradual liquidation of your investment is cheaper or even free of charge.

Risk Disclaimer – There are risks associated with investing. The value of your investment may fall or rise. Losses of the capital invested may occur. Past performance, simulations or forecasts are not a reliable indicator of future performance. We do not provide investment, legal and/or tax advice. Should this website contain information on the capital market, financial instruments and/or other topics relevant to investment, this information is intended solely as a general explanation of the investment services provided by companies in our group. Please also read our risk information and terms of use.

Circ Team photo Nicolas
Nicolas Zeitler
Team Lead Editorial
Nicolas is an editor specialising in finance and digital. Before joining Scalable Capital in 2019, he headed the financial editorial department at the comparison portal Check24. He earned his first journalistic spurs at Münchner Merkur. He then worked for the IT business magazine CIO and the agencies Grasundsterne and Fischerappelt. Nicolas studied political science at Ludwig Maximilian University in Munich.