10 min readExchange-traded fund (ETF) savings plans have been popular with investors since they launched in Germany at the turn of the new millennium. While flexibility and affordability are two of the main benefits, they also help investors to diversify their portfolios by offering access to a broader range of asset classes, including cryptocurrencies.
This article explores the world of ETF savings plans and explains how investors can use them to gain exposure to crypto.
What are ETF Savings Plans?
ETF Savings Plans allow investors to make monthly contributions- sometimes referred to as dollar cost averaging- from as low as €1 to a portfolio holding either individual ETFs or exchange-traded products (ETPs) or a basket of products. The plans can also hold other assets like shares and bonds.
The low minimum investment is made possible by fractional investing which involves purchasing a portion of an ETF or ETP based on a dollar amount rather than a full share. Fractional investing helps investors reach their goals by providing access to assets that would otherwise cost too much and could lead to concentration risk if held in a portfolio. For instance, a share in the SPDR S&P 500 ETF, the biggest ETF with assets under management of €387 billion (as of 10 November 2023), costs €387 (as of 10 November 2023). This holding could skew a portfolio’s weightings for an investor targeting a standard allocation (60% shares and 40% bonds) with a relatively low amount of capital.
Berlin-based Trade Republic was the first online broker in the EU to introduce fractional investing in ETFs in October 2022, offering the option to clients in Germany, France, Italy and Spain. Other brokers have since followed suit, including Scalable Capital.
Why are ETF Savings Plans Popular?
ETF savings plans provide several benefits:
Affordability: Dollar-cost averaging is a strategy which allows investors to make contributions that suit their budget at fixed intervals, such as monthly, regardless of the market conditions. ETFs and ETPs are also cheaper than investing in actively managed mutual funds.
Diversification: ETFs and ETPs typically provide exposure to a broad range of assets in a single product. For example, the iShares DAX ETF tracks the performance of the 40 of the biggest companies in Germany.
Long-term growth: ETF Savings Plans allow investors to take advantage of what Albert Einstein called the eighth wonder of the world: compound interest. By putting money to work in small amounts and at regular intervals, compound interest grows capital exponentially over time. The earlier an investor starts, the higher the potential returns.
Flexibility: As explained later in this article, it’s easy to start and pause ETF savings plans and adjust the monthly contributions.
Adding Crypto to a Savings Plan
Demand from investors for crypto exposure is growing for various reasons:
Diversification: Crypto displays limited correlation with traditional asset classes like shares and bonds, meaning it generally moves in different directions. For instance, research by CoinShares shows the correlation between bitcoin and the S&P 500 is relatively low at 34% and the NASDAQ at 33%. CoinShares also monitors several model portfolios in its Digital Asset Bi-Weekly Digest, which shows how a 4% bitcoin holding diversifies a portfolio with a standard asset allocation (and delivers better returns).
Potential returns: Bitcoin has been considered one of the most volatile asset classes due to some of the extreme market fluctuations it has experienced since launching in 2009, but it has also delivered considerable returns. Over the last decade, it has grown by an annual compound rate of 74%, so a €4,000 investment in 2013 would now be worth just over €1 million. However, bear in mind that past performance isn’t an indicator of future returns.
Future of finance: Many experts believe the emergence of crypto represents a paradigm shift in the global financial system. While consultancy Deloitte recognises there are advantages and disadvantages, it believes crypto ‘has become a great store of value…is here to stay…and is increasingly being accepted as a standard method of payment by reputable and well-known merchants worldwide’. Meanwhile, research by the World Economic Forum shows that over 50% of Americans see crypto as the future of finance and believe it will create a more equitable financial system.
Buying Crypto: Exchanges vs ETPs
Retail investors essentially have two main options to gain exposure to crypto: purchase directly from an exchange or buy an ETP. ETPs offer several advantages:
Safety: Many exchanges are unregulated or underregulated. That means investors aren’t protected should something go wrong, as users of FTX experienced at the end of 2022. However, ETPs are regulated investment products that must stick to the rules enforced by national and international financial authorities.
Simplicity: Custody comes into consideration when buying crypto directly through an exchange. Investors must choose whether to store it in a hot wallet (connected to the internet). a cold wallet (offline) or on the exchange. On the other hand, investors can trade ETPs on mainstream brokerages and hold them in a portfolio alongside traditional asset classes.
Liquidity: Physical ETPs, which buy and hold ‘physical’ crypto such as bitcoin, derive their liquidity from the underlying asset they track. They’re also typically more transparent, accurate and easier to understand than synthetic ETPs that use derivatives (complex financial instruments) to replicate the performance of the underlying asset.
Learn about investing in crypto ETPs.
Potential tax benefits of holding Physical ETPs in Germany
For German investors, holding physical ETPs can offer certain tax benefits. German general tax on capital gains on securities (Abgeltungssteuer) currently sits at 25%. However, for physical ETPs backed by assets such as gold and crypto, this tax doesn’t always apply if an investor holds the securities for longer than a year (generally, at least a year and a day). If the investor holds the security for a shorter period, the tax is payable only on gains exceeding €600).
Some (but not all) physical ETPs, including CoinShares Physical ETPs, are structured to benefit from this tax status.
Key risks
As with any investment, there are risks involved when buying and selling physical crypto ETPs.
Despite being physically-backed by the underlying crypto, investors’ capital is at risk and investors may lose part or all of their investment, as investors are fully exposed to the price of crypto which has been known to experience both large gains and losses
Crypto ETPs are generally structured as debt securities, and not as equities.
The bid/offer prices of the ETP on an exchange will likely differ from the trading price of the underlying cryptocurrency
It is important to remember that past performance is not an indicator of future performance. If in doubt, investors should seek professional advice to ensure an allocation to crypto fits with their overall goals and objectives.
Setting Up an ETF Savings Plan
Setting up a savings plan is easy, involving five steps:
1) Define a strategy: As with any portfolio, investors need to decide how to allocate capital across traditional assets and crypto based on their goals and how much risk they feel comfortable taking.
2) Select the right product: When choosing a crypto ETP, check the provider has a long and reputable track record.
3) Choose a broker: Make sure it supports the chosen ETP and offers a savings plan.
4) Set up the plan: Establish a regular contribution and schedule.
5) Monitor performance: Periodically review the plan’s performance and adjust the holdings and contributions as needed.
Conclusion
ETF savings plans leverage fractional investing to allow investors to build a portfolio through monthly contributions from as little as €1. They’re popular because they’re affordable, they boost diversification, they have the potential to deliver long-term growth and they’re flexible.
While investors can choose from ETFs offering exposure to a broad range of asset classes, they may want to invest in crypto because it’s generally uncorrelated with traditional assets, and it has a track record of delivering high returns (although past performance isn’t an indicator of future returns).
To add crypto to your broker’s ETF Savings Plan, you can use CoinShares’ How To Buy tool to begin.
