Germany is the powerhouse of the European economic community, playing a leadership role in the way that the European Union has evolved over the past 25 years. As one of the world's leading exporters, Germany has strong alliances with the U.S. and other trading partners, and investors are familiar with the country's leading companies, many of which are giants in their industries. Investing in Germany is relatively simple, even for U.S. investors, and there are several ways you can get exposure to German stocks in your portfolio. The most popular ways to invest in Germany are:
- Investing directly on German stock exchanges.
- Investing in German stocks that list on U.S. stock exchanges.
- Investing in exchange-traded funds that own German stocks.
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We'll look at each of these methods of investing below.
Investing directly in German markets
Direct investment in German stocks on German exchanges is relatively difficult for U.S. investors. Many brokerage companies don't offer trading on foreign exchanges at all, and even those that do don't always include Germany's major stock exchanges on their lists. However, at least one brokerage company does allow its investors to invest directly in shares listed on stock exchanges in key financial centers such as Frankfurt and Stuttgart, as well as broader pan-European exchanges that have German affiliates.
As the European Union evolves, investors should expect the ability to invest directly in Germany to expand somewhat, although perhaps more for those in other nations on the continent rather than across the Atlantic. Because of current limited access, many investors find it easier to seek alternatives to direct investment in Germany.
Investing in German stocks that list on U.S. stock exchanges
Many major German companies have their shares listed on U.S. stock exchanges. To do so, a company need only pay the appropriate listing fees to the New York Stock Exchange or Nasdaq Stock Exchange and comply with U.S. securities laws in disclosing financial information to shareholders. Many German companies use American depositary receipts or shares to facilitate fitting a foreign listing within their capital structures.
The primary benefit of U.S.-listed German stocks for investors is that you'll typically find the cream of the crop represented on U.S. stock exchanges. Just the effort of getting a U.S. listing reflects a commitment from a German company to maximize its access to capital, and that suggests a greater desire for growth than the typical business. On the other hand, if you rely solely on U.S.-listed German stocks, you'll miss out on some of the businesses that have the most promise, especially among smaller-sized German companies. For conservative investors who want blue chip quality stocks, U.S. listings can be a great place to start looking.
Investing in German ETFs
You can find exchange-traded funds that focus on the German stock market. Among traditional ETFs, the iShares MSCI Germany ETF (NYSEMKT: EWG) offers exposure to nearly 60 German stocks, with concentrations in the consumer discretionary, financials, materials, industrials, healthcare, and information technology sectors. Well-known names like healthcare specialist Bayer, tech giant SAP, and industrial conglomerate Siemens are the fund's top three holdings, and other big players in the financial, automotive, and athletic apparel spaces help to fill out the rest of the fund's biggest positions. With an expense ratio of less than 0.50%, the ETF is a relatively inexpensive way to get foreign exposure.
Beyond traditional ETFs, the closed-end New Germany Fund (NYSE: GF) offers a way to invest in Germany. The closed-end fund has a more industrial focus, with industrial stocks making up a third of the portfolio. Basic materials represent almost 20% of the fund's assets, while consumer goods and financials are also well-represented in the mix. New Germany Fund trades at a nearly 10% discount to net asset value, offering a potential bargain to investors, but its expense ratio of 1.21% makes it a more costly option for long-term investors.
Returns in Germany have been impressive in recent years, with double-digit percentage average returns over the past five years. If you're interested in adding German stock market exposure to your portfolio, these three ways of getting access to German stocks could be just what you're looking for going forward.
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