Setting Up an ETF Savings Plan: A Step-by-Step Guide

An ETF savings plan is an excellent way to build wealth over the long term, even if you’re starting with small amounts. With an ETF savings plan, you invest a fixed amount regularly into exchange-traded funds (ETFs), allowing you to benefit from broad diversification and low-cost structures.

In this article, you’ll learn why an ETF savings plan is a smart choice, how to select the best broker, and how to set up your plan step by step.

Why an ETF Savings Plan Is Ideal for Long-Term Investing

An ETF savings plan offers many advantages, especially for beginners and long-term investors. By making regular contributions, you can benefit from market movements and take advantage of compound interest.

Regular Investing and the Compound Interest Effect

One of the biggest benefits of an ETF savings plan is the ability to invest regularly. Instead of trying to time the market, you invest a fixed amount each month or quarter, regardless of market conditions. This allows you to benefit from the cost-average effect, where you buy more shares when prices are low and fewer when prices are high. Over the years, this strategy smooths out your purchase price, helping you achieve a more favorable average return in the long run.

Additionally, you benefit from the compound interest effect. This effect kicks in when the returns you generate from your ETFs are reinvested, creating new returns. Over time, this leads to exponential growth of your capital.

Building Wealth with Small Contributions

Another advantage of an ETF savings plan is that you can start with small amounts. Many brokers allow you to invest with as little as €25 per month. By contributing regularly, even with small amounts, you can build wealth over the long term. The earlier you start, the more powerful the compound interest effect becomes, allowing your capital to grow over decades.

How to Choose the Best Broker for Your Savings Plan

Choosing the right broker is a critical step in setting up an ETF savings plan. Different brokers offer different conditions and fee structures that can affect your long-term returns.

What to Look for When Choosing a Broker

When comparing brokers for ETF savings plans, consider the following factors:

Fees: Pay attention to the fees for executing your savings plan. Lower fees are essential to ensure your returns aren’t diminished.

ETF Selection: Not all brokers offer the same range of ETFs. Make sure your broker provides access to the ETFs you want in your savings plan.

User-Friendliness: An intuitive platform or app can simplify your experience and make managing your savings plan more straightforward.

Additional Services: Some brokers offer extra services, such as tax reports or automatic dividend reinvestment.

Top Brokers for ETF Savings Plans in Comparison

Here are some of the most popular brokers for ETF savings plans in Germany:

Trade Republic: This broker offers free ETF savings plans, making it an attractive option for long-term investors. It has a good selection of ETFs and a user-friendly app.

Scalable Capital: Scalable Capital also offers a wide range of ETF savings plans, starting at €1 per savings rate with no additional fees on certain models.

comdirect: This established direct bank offers a broad selection of ETFs and comprehensive analysis tools that may be particularly appealing for more experienced investors. They frequently have promotions with fee-free ETF savings plans.

Compare these brokers based on your needs before setting up your savings plan.

Setting Up Your ETF Savings Plan Step-by-Step

Once you’ve chosen the right broker, you can set up your ETF savings plan in just a few simple steps. The process is straightforward and suitable for beginners.

How to Choose the Right ETFs for Your Savings Plan

Selecting the right ETF is crucial to the success of your savings plan. When choosing an ETF, pay attention to the following criteria:

Index: ETFs typically track an index, such as the MSCI World, the S&P 500, or the DAX. Choose an index that aligns with your investment goals. Global indices like the MSCI World offer broad exposure across various markets, making them particularly suitable for long-term investing.

Expense Ratio (TER): The Total Expense Ratio indicates the annual cost of the ETF. Lower costs mean that a larger share of your returns remains with you. Most ETFs have a TER between 0.05% and 0.5%.

Distributing vs. Accumulating: Distributing ETFs pay out dividends to investors, while accumulating ETFs automatically reinvest dividends. Accumulating ETFs are attractive for investors looking to maximize the compound interest effect.

Setting and Adjusting Your Monthly Savings Amount

A major advantage of ETF savings plans is the flexibility in choosing your monthly savings amount. Think about how much you can invest regularly without straining your budget. Many investors start with €25 to €100 per month, but you can adjust this amount at any time.

As your financial situation improves, you can increase your savings rate. Similarly, during times of financial strain, you can reduce your savings amount or pause it temporarily without ending your savings plan.

How to Optimize Your ETF Savings Plan

While an ETF savings plan requires minimal active management, it’s important to review and adjust it periodically to ensure that you’re meeting your financial goals.

Regularly Reviewing and Adjusting Your Savings Plan

Even though an ETF savings plan is designed for long-term growth, you should review it regularly. Checking your savings plan once a year can help ensure it still aligns with your goals. If your financial goals or risk tolerance change, you can adjust your savings plan accordingly.

It can also be beneficial to increase your monthly savings amount as your financial situation improves. By making regular adjustments, you can ensure that your savings plan remains optimized for your needs.

Diversifying Your ETF Portfolio Over Time

Over time, you can further diversify your portfolio by adding more ETFs. While a single ETF tracking a broad index like the MSCI World provides a solid foundation, you can add sector-specific ETFs or sustainable ETFs to broaden your portfolio further.

Ensuring that your portfolio is diversified not only geographically but also across different asset classes and sectors can help you reduce risk and take advantage of various market opportunities.

Conclusion

An ETF savings plan is a simple and effective way to build wealth over the long term, even with small amounts. Through regular investments and the compound interest effect, you can grow your capital steadily over the years. Choose a broker with low fees and suitable ETFs to optimize your savings plan. With the right strategy and regular adjustments, you’ll benefit from your ETF savings plan in the long run.