Over There: Investing in Germany

Today I’m introducing a new feature I’m very excited about. It’s extremely common in financial journalism and even in popular culture to see vague references to “how things work” in some other country, whether it’s refugee policies in Denmark, the health insurance marketplace in Singapore, or employment law in France.

Since, as readers know by now, I have an unfortunate literal tendency, I’m always left wondering, “how do things really work over there?”

That’s the origin of this new feature: I’m going to be taking a closer look at how people go about basic tasks under totally different regulatory regimes than the ones we have in the United States.

As a heads up, I’m definitely going to get a lot of stuff wrong. But that’s because I’m trying to take a closer look than the superficial glosses you get from the Associated Press. Also, Russian is my only second language, so a lot of this is going to be based on Google Chrome’s built-in translation feature. With all that out of the way, let’s get to the first installment: investing in Germany!

Do Germans invest?

There are two slightly different questions here. Germany is a market capitalist economy, and virtually all of its large companies are publicly listed on its stock exchanges, primarily the Frankfurt Stock Exchange and its two trading venues, Xetra and Börse Frankfurt.

German companies also sponsor American Depository Receipts which allow Americans to purchase shares in companies like Volkswagen (VLKAY on the over-the-counter market). These are slightly different from US-listed shares of international companies like Deutsche Bank (DB on the New York Stock Exchange).

All of this is to say that unlike, for example, Cuba or North Korea, large German firms are in principle organized for the creation and distribution of profits to their shareholders.

However, the question of whether Germans themselves invest is somewhat trickier. In 2010, Bloomberg wrote that:

“Only 6 percent directly owned stocks in the first half of 2010, according to Deutsches Aktien­institut (DAI), a shareholder lobby association, whereas stock ownership for the French is 15 percent and 10 percent for the Britons. Only 9.4 percent of the German population owned shares of mutual funds in the first half of 2010.”

In 2013, the Economist wrote that:

“only 15% of Germans own shares directly, while a partly overlapping 21% own mutual funds.”

In 2015 the Financial Times reported:

“Only 8.4m Germans, or 13 per cent of the population, held shares or equity funds in 2014, according to Deutsches Aktieninstitut, a lobby group — down a third since 2001.”

So the simplest answer seems to be that most Germans do not own shares in German companies, or in any other country’s companies.

How do Germans save?

This may seem like a striking conclusion because one cliche about the economic geography of the European Union is that “frugal Northern Europeans” subsidize “profligate Southern Europeans.” And it turns out that Germans do have a relatively high savings rate — they just don’t use their savings to purchase shares of private companies. Instead, they deposit them in a range of savings vehicles, the most distinctive of which is the “Riester-Rente,” which gives eligible participants a state subsidy for deferring a certain percentage of their income in qualified savings vehicles.

Let me be frank: the Riester-Rente sounds like a bureaucratic nightmare. This seemingly-knowledgable website describes the conditions as follows:

“If a beneficiary accesses the Riester assets before the age of 60 (remark: for contracts concluded from 2012 onwards: 62), cancels a Riester contract, or dies without qualifying heirs (i.e. a spouse or children for which children allowances / “Kindergeld”are paid), all government benefits (subsidies and tax savings) so far must be repaid in monthly installments (“förderschädliche Verwendung“). Therefore, Riester contracts are usually not cancelled before retirement. Beneficiaries spending their retirement outside of the EU/EEA also have to repay the benefits as described above.”

It appears to me that the majority of German savings takes three primary forms: payroll tax contributions to the state pension system; contributions to a Riester-Rente and other private pension schemes; and deposits in bank savings accounts.

What are the options for a German to invest?

Germans do have access to a number of brokerages which allow them, if they choose, to purchase shares in private companies. You can tell by the websites of these brokerages that they are targeted primarily at foreign exchange and options gamblers, but this appears to be a completely legitimate brokerage firm that allows Germans to purchase shares on Xetra, Euronext, and US stock exchanges (and also shows the prices they charge and the prices of their competitors).

Since German brokerages allow purchases on US exchanges, I assume it is possible for them to purchase the same extremely-low-cost Vanguard ETF’s that are available to us (though I’d love if a reader had additional insight on this question).

How would I invest, as a German?

I think this is a fascinating question that US-based financial journalists spend exactly zero time thinking about. For example, we often talk about “home-country” bias in the United States, but what is the proper locus of home-country bias for a German investor to exhibit? Is her home country Germany, Northern Europe, the Eurozone, or the European Union?

I think if I were a German socking money away each month in my brokerage account, and I could only use exchange-traded funds, I’d try to come up with something like this:

• 50-60%: iShares MSCI Eurozone ETF (EZU);
• 20-30%: Vanguard Total Stock Market ETF (VTI);
• 5-15%: Vanguard FTSE Pacific ETF (VPL);
• 5-15%: Vanguard FTSE Emerging Markets ETF (VWO).

Remember, this portfolio will be Euro-denominated in my German brokerage account, and all my dividends will be distributed in Euros, so I’d want to start with a strong Euro-denominated tilt in the portfolio. Adding the United States total stock market would give me access to the largest market economy in the world, and then I’d want some “just in case” exposure to the Pacific and emerging markets.

What about taxes?

It appears to me (Wikipedia, KPMG) that all dividends, capital gains, and investment income are subject to a 26.38% tax (technically a 25% tax plus a 5.5% surcharge on that tax).

However, it appears that 801 Euros in capital gains are completely exempt from taxation each year, and if your income tax rate is below 25% you are entitled to the a refund of the difference between your income tax rate and the 25% withheld from your capital gains and dividends.

This all sounds quite complicated but I believe it is much simplified by the fact that most Germans don’t own shares so never have to calculate the refund they’re owed on their withheld capital gains.

Have Germans been domesticated by their welfare state, or have they domesticated their industrial state?

While researching this post I kept coming back to the same quandary: Germany notoriously enjoys one of the most competitive and profitable industrial and manufacturing bases in the world, but Germans themselves seem to reap virtually none of the rewards through claims on the stream of income their factories and businesses generate.

The accumulation of wealth in the form of shares is treated as a fringe activity, while pensions, health care and education are treated as entitlements. Would making wealth. as opposed to financial security, more widespread lead to the same fractures in German society we see in the United States? 

I didn’t come here with any answers, but now you know everything I know about investing in Germany.

What would you like to see in the next edition of “Over There?”