Many investors looking for an ETF that holds European Union (EU) equities are searching more precisely for ETFs with a focus on Germany, the strongest economy in the EU. Germany is the single-largest EU national economy and is the fourth-largest economy worldwide as measured by nominal GDP. Like the U.S. economy, the German economy is increasingly dominated by the service sector rather than industrial or manufacturing production. Major exports of Germany's economy include automobiles, electronics and pharmaceuticals. Among the most prominent German-based companies are Daimler, Bayer, BASF, Nivea and Deutsche Bank. Only one ETF directly tracks the blue-chip DAX Index. The other most popular index of German equities is the broader MSCI Germany Index.
Horizons DAX Germany ETF
The Horizons DAX Germany ETF (NASDAQ: DAX), launched in 2014 by Recon Capital which was acquired by Horizons ETFs Management in 2017, has garnered approximately $15 million in total assets under management (AUM). This is the only ETF available that tracks the benchmark German stock market index, the DAX Index, which is composed of the 30 largest Germany-based companies, as measured by market cap, traded on the Frankfurt Exchange. The weighted-average market cap of the companies included in the index is $66 billion. The DAX Index is one of the few major stock market indexes calculated as a total return index that includes dividend reinvestments. This ETF can also be viewed as an investment in German exports because most of the major German large-cap companies do a substantial amount of export business.
The DAX ETF is not currency-hedged, so investors are exposed to currency exchange risk of the euro's value relative to the U.S. dollar. The fund is normally at least 80% invested in the common stock of the companies in the underlying benchmark index. Financial services, consumer cyclicals, health care and basic materials are the four market sectors that account for more than 50% of the fund's portfolio holdings. Major holdings of this ETF include Bayer AG at 9%, Daimler AG at 8%, Allianz SE at 8%, Siemens AG at 8% and BASF SE at 8%.
The expense ratio for the Horizons DAX Germany ETF is 0.45%. The fund offers a dividend yield of 1.09%. Its one-year return as of November 2015 is -5.44%. This ETF has not been trading long enough for risk and return ratings to be established. The DAX ETF is most appropriate for investors seeking specific exposure to the equities that make up the DAX Index. It is not well suited for investors who are totally averse to currency exchange risk.
iShares MSCI Germany ETF
The iShares MSCI Germany ETF (NYSEARCA: EWG) was launched by BlackRock in 1996. The fund has nearly $6 billion in total assets and an average daily trading volume of over $100 million, dwarfing the DAX ETF's average daily volume of only $100,000. It is thus a significantly more liquid ETF, with a much tighter average bid-ask spread of only 0.04%. The average bid-ask percentage spread for the DAX ETF is 0.26%. This ETF aims to mirror the performance of the much broader German stock index, the MSCI Germany Index. This market-cap-weighted index, which contains roughly twice as many holdings as the DAX Index, is designed to reflect the overall performance of large- and mid-cap German equities and includes coverage of approximately 80% of the total German equity market. The average weighted market-cap value of companies included in the index is approximately $60 billion, which is slightly lower than that of the DAX Index.
Like the DAX ETF, the EWG fund involves currency-exchange risk. An alternative, currency-hedged version of the fund is offered by BlackRock, the Currency Hedged MSCI Germany ETF (NYSEARCA: HEWG).
The consumer cyclicals sector accounts for approximately 20% of the fund's portfolio assets. The financial services sector accounts for another 18% of fund holdings, followed by the health care and basic materials sectors, which account for approximately 15% each. The top four holdings of this ETF are the same as those of the DAX ETF, although they account for slightly different percentages of the fund's total portfolio assets: Bayer AG at 9%, Daimler AG at 7%, Allianz SE at 7% and Siemens AG at 7%. Other major holdings include Deutsche Telekom AG at 5% and Deutsche Bank AG at 3%. The fund's annual portfolio turnover ratio is a low 3%.
The expense ratio for this ETF is 0.48%. It offers a dividend yield of 1.85%. The fund's five-year annualized return as of November 2015 is 4.92%. Zacks Investment Research rates the EWG ETF as medium risk. The iShares MSCI Germany ETF is well suited for investors seeking a broad, market-cap-weighted exposure to the overall German equity market.
WisdomTree Germany Hedged Equity ETF
The WisdomTree Germany Hedged Equity ETF (NASDAQ: DXGE) was launched by WisdomTree in 2013. It has approximately $280 million in total assets and an average daily trading volume of approximately $3.5 million. This ETF tracks the dividend-weighted WisdomTree Germany Hedged Equity Index. The underlying index is designed to reflect the performance of the German equity market and neutralize the currency exchange risk associated with fluctuations in the value of the euro relative to the U.S. dollar. The index is composed of dividend-paying companies traded on the Frankfurt Exchange that derive more than 20% of their revenues from sources outside Germany. The weighted-average market cap of the companies that make up the index is approximately $52 billion.
The consumer cyclicals and financial services sectors each account for roughly 20% of the fund's holdings. The industrials and basic materials sectors each make up another 15% of portfolio assets. Top holdings of the fund are Allianz SE at 6%, Deutsche Telekom AG at 6%, Siemens AG at 5% and Daimler AG at 5%. The fund's annual portfolio turnover ratio is 11%.
The WisdomTree Germany Hedged Equity ETF carries an expense ratio of 0.48% and offers a dividend yield of 1.76%. The fund's one-year return as of November 2015 is 11.18%. Zacks rates this ETF as medium risk. This ETF is most appropriate for investors seeking exposure to the German equities market who wish to minimize the associated currency-exchange risk.