Equity: Germany - Total Market
In an interesting twist, there are as many currency-hedged Germany ETFs as unhedged ones. Euro weakness against the dollar explains the appeal of the currency-hedged ETFs, which remove
“there are as many currency-hedged Germany ETFs as unhedged” direct euro exposure and leave investors solely with equity exposure.
EWG is the segment powerhouse: It provides comprehensive, neutral exposure to the German market, and is easily our Analyst Pick for the segment. It excludes small-caps, but still captures the space well overall. EWG dominates with billions in AUM while the others struggle to accumulate even a fraction as much.
DBGR, DXGE and HEWG also provide comprehensive exposure to German equities but hedge currency exposure. DBGR and HEWG follow a straight cap-weighted strategy, while DXGE strips out companies getting more than 80% of revenues domestically, and weights its constituents by dividends. FGM employs a quasi-active model to pick potential outperformers. Meanwhile, QDEU equally weights three factor indices: one each for low volatility, quality, and value.
None of the funds veer far from the neutral market except for FGM. EWG, HEWG and DBGR weight the biggest German companies heavily: Bayer, Siemens, and Daimler together make up about 1/4 of each portfolio. DXGE's dividend weighting strategy still heavily favors large-caps. In contrast, FGM uses a tiered equal-weighting scheme that de-emphasizes the biggest firms. QDEU makes a few different selections but otherwise doesn't look radically different from our benchmark.
Cost-conscious investors should avoid FGM: its steep fee and wide spreads make it expensive for traders and long-term investors alike. EWG and HEWG are the only funds liquid enough to suit traders' needs, although DXGE, DBGR and HEWG see reasonable spreads, which can be managed with limit orders. QDEU's low fee might appeal to long-term investors, but it won't be easy to trade. (Insight updated 11/22/17)
All Funds (8)
EWG $4.74 B 4741026570 big, cheap, & vanilla
QDEU $19.36 M 19364700 weak trader, high closure risk
DXGE $110.39 M 110389995 FX-hedged exporters
GRMY $2.41 M 2408024.08 follows the same index as HEWI
DBGR $51.2 M 51203947.2 FX-hedged
FGM $234.85 M 234845281.85216 pricey quant model
HEWG $679.3 M 679295040 FX-hedged EWG
FLGR $2.5 M 2501000 N/A
ETF.com Grade as 11/16/17
Equity: Germany - Total Market
ETF.com Efficiency Insight
With the exception of a couple outliers, most funds in the segment charge within a few bps of each other. However, index tracking differences and the effects of securities lending mean that
“not all funds are equally costly to hold” not all funds are equally costly to hold.
iShares' EWG and WisdomTree's DXGE have tracked their indexes consistently and closely, with securities lending income partly offsetting their fees. Deutsche's DBGR has also tracked closely most of the time, but not always—it's been more variable than we'd like.
HEWG is a special case. Our tracking stats compare the fund's performance to its index, but HEWG gets its equity exposure by holding EWG, which continues to trade long after the German market has closed each day. As a result, HEWG's hugely variable tracking stats actually reflect price discovery by EWG after the close. However, HEWG's median tracking difference is probably not too far off from actual long-term holding costs, and isn't very impressive.
First Trust's FGM charges a large premium over peer funds for its "smart beta" AlphaDEX methodology. Realized costs have been all over the place, likely due to slippage resulting from portfolio turnover during the fund's semi-annual reconstitutions. SSgA's QDEU also follows a "smart beta" index, but charges far less than peers. We'll have complete tracking stats for the fund in mid-2016.
QDEU is a newer fund that hasn't attracted much interest—we see elevated closure risk. All other segment funds have significant asset bases and won't likely be shutting down any time soon. EWG in particular has proven itself over the past two decades and consequently the fund has accumulated billions in assets.
All funds have been tax efficient in recent years by avoiding capital gains payouts. (Insight updated 11/22/17)
ETF.com Tradability Insight
EWG, and its currency-hedged variant HEWG, are the only real choices for traders in this segment. Both funds trade tens of millions of dollars every day at penny-wide spreads. HEWG trades
“EWG and HEWG are trader's only reach choices” as well as it does in part because it holds EWG for its underlying equity exposure. Other funds in the segment trade well too, but won't suffice for those demanding maximum liquidity.
In particular, most investors will do well trading DXGE or DBGR, which trade all day at very reasonable spreads. FGM is also reasonably liquid, though a less-liquid underlying basket means that premiums and discounts are more likely, so check iNAV and place careful limit orders.
QDEU is the only fund in the segment that sees real liquidity problems. Just a few hundred shares change hands most days, and while quoted spreads are usually reasonable, the fund's shallow order book means that careless market orders can easily spike trading costs upward. Proceed with caution.
In general, large traders should be able to get better execution by using a liquidity provider. Trading in the morning may help assure best execution as well, as the German equity market closes early in the US trading day (although creations in HEWG are done using EWG, which trades during US market hours). Again, beware of weaker underlying liquidity in FGM. (Insight updated 11/22/17)
ETF.com Fit Insight
EWG, HEWG and DBGR all provide relatively straight-forward market cap-weighted exposure to the German equity market. Meanwhile, FGM offers a restructured portfolio, while DXGE has a
“for broad-based exposure to the German equity market, EWG is your best choice” multi-factor selection process and weights its constituents based on dividends. QDEU offers exposure to three different factor indexes.
EWG and DBGR hold a traditional, market-cap-weighted portfolio of about 50 of the largest German companies, while HEWG literally holds EWG with a forward currency contract overlay to neutralize any euro exposure. The 3 funds are highly concentrated in the largest firms, but otherwise mirror our benchmark closely. EWG, DBGR and HEWG also have the same top holdings as our segment benchmark: Bayer, Siemens, and Daimler together comprise about 1/4 of each portfolio.
DBGR, DXGE and HEWG set themselves apart by hedging out euro exposure from their portfolios. Currency-hedging makes sense for countries like Germany that are heavily dependent on exports: The state of the economy and the currency are usually inversely related since German goods become more appealing on the global stage when the euro depreciates.
In comparison, FGM holds a tiered equal-weighted portfolio of 40 companies selected by its proprietary quant model. It excludes some of the biggest companies in favor of mid- and small-caps. It follows that FGM tilts much smaller than the market.
QDEU's "quality mix" strategy doesn't actually alter the fund's portfolio significantly. We see only mild size and sector tilts. Like FGM, QDEU isn't nearly as concentrated as competing funds, or our benchmark.
Overall, if you're looking for broad-based exposure to the German equity market, EWG is your best choice. If, instead, you trust a quant model to pick outperformers, roll the dice with FGM or QDEU. Lastly, if you want exposure to German equities without exposure to the euro, consider DBGR, HEWG or DXGE. (Insight updated 11/22/17)