ETF savings plans – or sparplans as they are known inside of their German motherland – have taken the European retail market by storm but why are they so appealing to investors and how big can they get?
Their ease of access, flexibility and “set it and forget it” approach has lured investors in and helped transform Germany into an ETF powerhouse in Europe, with issuers rushing to get a piece of the action.
According to BlackRock, 4.9 million investors were contributing to the plans in 2022 – over 90% of which are domiciled in Germany – up from 1.9 million in 2019 and three million in 2021.
Savings plans were first introduced in Germany in 2004 following reforms to the pension system and were first offered via banks and insurance companies.
While ETF savings plans were not established until later in the decade, the rise of digital wealth managers and the self-directed investor boom during the COVID-19 pandemic catapulted the structure into the mainstream.
Other European countries are now looking to emulate their success but what are they and how do they work?
What is an ETF savings plan?
ETF savings plans allow self-directed individual investors to contribute monthly into ready-made baskets or single ETFs via direct debit, sometimes from as little as €1.
Investors are not limited to ETFs and can also invest in stocks and bonds through the plans.
They can be purchased through local brokers or digital wealth managers such as Trade Republic and Scalable Capital, which have been front and centre of the ETF savings plan’s rise over the past few years.
Investors can invest as little as they like due to the fractional investing model that underpins the savings plan. Fractional trading allows investors to buy a slice of an ETF or stock for any amount, allowing access to a broader range of assets.
A broker will aggregate the orders of all its investors and execute them on specific days of the month, making it easier to offer the service commission free.
Why are they so popular?
Digital investing has allowed investors to access ETF savings plans at the click of a button.
Investors are also given the flexibility to choose the length of their investment horizon and how much they want to invest monthly, enabling a much younger generation to start their investment journey.
The low-cost and diversified portfolios of UCITS ETFs also benefit investors while making regular investments helps reduce market timing risks and averages price fluctuations over time.
Despite this, there are a few downsides investors should consider when opening a savings plan.
By executing the orders on the same day every month, investors do not have the flexibility to trade whenever they want. In addition, while most of the fees are transparent, investors do not get insight into the spread, meaning investors cannot be sure they are buying at the cheapest price.
How big can they get?
There have been numerous predictions about how big the ETF savings plan market will grow over the next decade.
BlackRock has forecasted the number of ETF investors will grow by 32% over the next 12 months with all markets contributing to the rise. Last April, the asset manager predicted the number of investors contributing to ETF savings plans to hit 20 million by 2026.
While Germany has been the epicentre of the sparplan, other European countries are looking to copy the structure. Earlier this month, ETF investment platform InvestEngine launched an ETF savings plan for its UK customers, allowing them to make regular investments from as little as £10 a week.
The group said it hopes to open the door to new and less experienced investors, with less than 30% of UK adults feeling like investing is “not for people like them”, according to a survey by Opinium.
Meanwhile, digital wealth manager Bux launched ETF savings plans across eight European countries in partnership with BlackRock.