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By Daniel Kanzler and Alexander Weis
If you are interested in ETFs in German-speaking countries, then all routes basically lead to one person: Dr. Gerd Kommer. He has been writing guidebooks on capital investment with index funds and ETFs for 23 years and has worked in the financial sector for 30 years. Gerd Kommer has popularized forecast-free and rule-based investing based on established scientific findings in the private investor market in the German-speaking countries and coined the term “world portfolio” for it. This investment approach, which can be implemented with ETFs, has become increasingly well-known among private investors in German-speaking countries in recent years due to its convincing concept, its attractive long-term expected return and its ease of implementation – occasionally under similar names such as “Weltdepot” or “Welt-AG” and in slightly modified forms of implementation.
The world portfolio is not a fixed composition of specific ETFs or security indices, but a coherent overall concept that can be flexibly adapted by each investor to their specific circumstances and goals, almost like the iconic red Swiss army knives from Victorinox. However, from an investor’s perspective, this flexibility can also be perceived as complexity or increased workload.
From years of interaction with private investor households, we in the Gerd Kommer team know that among investors who find the world portfolio concept technically convincing, there are many who do not want to implement it in Do-it-yourself mode (DIY mode) – perhaps due to a lack of time, a lack of professional interest or simply a desire to delegate important investment decisions to an expert on a temporary or longer-term basis.
In order to simplify the process of setting up a world portfolio for those interested private investors who do not wish to compile and implement the world portfolio and its components themselves, we have so far offered two solutions:
Solution number 1 is our asset management, which has been in place since 2017 Gerd Kommer Invest. We thus offer wealthy households, foundations and small companies in German-speaking countries comprehensive support including holistic financial advice from a minimum investment amount of one million euros. Since only a small group of households can take advantage of this, we have been looking for another solution over time.
Solution number 2 is our Robo Advisor Gerd Kommer Capital which was launched in October 2020. With a robo advisor, i.e. a digital asset management system, the investor is initially relieved of the task of determining risk tolerance and selecting individual ETFs, as well as screening (searching for and selecting) new ETFs and rebalancing during ongoing operations. With GKC, you can invest from a starting amount of 25 euros. The costs of a robo solution are naturally higher than in DIY mode.
We have had a solution for DIY investors since June 2023: The L& G Gerd Kommer Multifactor Equity UCITS ETF, which we call the “Gerd Kommer ETF” in this blog post for the sake of brevity. Below we summarize the most important features of the Gerd Kommer ETF.
This publication is for marketing purposes. Please read the fund prospectus and the key investor information before making a final investment decision.
1 Basic features
The Gerd Kommer ETF is a pure equity ETF that tracks the risky portfolio part of the world portfolio concept in a single fund, i.e. a “1-ETF solution”. “Risky portfolio component” here means “global stock market”. If you want to invest in the form of a strongly return-oriented “100/0 level 1 asset allocation” (100% risky/0% low-risk), we do not believe you need any other ETF besides the Gerd Kommer ETF. If you want to be more conservative (safety-oriented) – i.e. with a level 1 asset allocation of “90/10”, “80/20”, “70/30” etc. up to “10/90” – you can either combine the Gerd Kommer ETF with a bond ETF or cover the low-risk part of the portfolio with interest-bearing overnight money at a bank. The bond ETF used should exclusively cover short residual maturities of debtors with high credit ratings in the investor’s home currency. For risk reasons, the balance of the call deposit account should not exceed 100,000 euros, the upper limit of the state deposit guarantee in Germany.
2 Asset management company (KVG)
The Gerd Kommer ETF is managed by the ETF provider Legal & General Investment Management (“L& G”). L& G is part of the British Legal & General Group (“L&G”), one of the largest insurance companies in Europe. L&G is one of the world’s leading asset managers. The assets managed by L&G as at December 2022 are worth around EUR 1,300 billion. As of mid-2023, L&G offers almost 50 different ETFs on the German market.
3 Underlying stock index
The index on which the Gerd Kommer ETF is based was developed by Dr. Gerd Kommer and his team in cooperation with Solactive AG and L&G in 2022 and 2023. Solactive is a German index provider based in Frankfurt. The parent index on which the index is based is called Solactive GBS Global Markets Investable Universe USD Index NTR (ISIN: DE000SL0EM79) and the index on which the Gerd Kommer ETF is based is called Solactive Gerd Kommer Multifactor Equity Index NTR (ISIN: DE000SL0G219). [1] The index tracks the global stock market, the “World ACWI”, so in principle it is roughly comparable to an equity ETF based on the well-known MSCI ACWI Index. However, the Gerd Kommer ETF deliberately and significantly deviates from an MSCI World ETF in some important respects described below. [2]
4 “All Cap All Market Principle”
Unlike an MSCI World ETF, the Gerd Kommer ETF also includes emerging market stocks in the regional dimension and small caps (second-line stocks) in the size dimension. The ETF can therefore be described as an “All Cap All Market ETF”, which tracks the entire world stock market. The MSCI World, on the other hand, does not include emerging market equities and small caps.
5 Country weighting
The Gerd Kommer ETF comprises almost 50 countries (compared to 23 for an MSCI World ETF [as at June 2023]). The weighting of an individual country in the index is determined 50% by its market capitalization and 50% by the country’s share of global gross domestic product (global economic performance). For example, the US cluster risk that we see in the MSCI World Index (over 67% US weighting as at June 2023) is significantly mitigated. In turn, emerging markets and the majority of non-US developed countries are weighted higher. (This YouTube video goes into more detail on the differences in regional weightings and this blog post on investing in emerging markets)
6 Form of index replication
The Gerd Kommer ETF is a physically replicating ETF, i.e. not a swap ETF (synthetic ETF). This ensures that the underlying index is replicated as faithfully as possible and that there is no counterparty risk in the form of a bank. Physical replication is carried out by means of optimized sampling in order to keep the costs in the fund as low as possible.
7 Appropriation of dividends
The ETF is available in an accumulating (WKN: WELT0A; ISIN: IE0001UQQ933) and a distributing (WKN: WELT0B; ISIN IE000FPWSL69) share class to meet different investor needs. If you would like to find out more about the respective advantages and disadvantages of distributing and accumulating ETFs, you can do so via our blog post.
8 Factor investing
The Gerd Kommer ETF is a multi-factor ETF that overweights so-called “factor premiums” compared to a market-neutral (“plain vanilla”) passive stock index. [3] Factor investing is also known as smart beta investing. Factor premiums are characteristics of stocks identified by academics that have a systematic, statistical relationship with return and risk and whose overweighting in a stock portfolio is intended to generate an excess return over a market-neutral portfolio in the long term. The factor premiums reflected in the Gerd Kommer ETF are:
- Size: Stocks of small companies, measured by their market capitalization, have a higher statistical expected return than the stocks of large companies.
- Value: Stocks whose price is low relative to certain business ratios (e.g. profit or book equity) have a higher statistical expected return than otherwise identical stocks for which this is not the case. In other words: “Low-priced” stocks (value or value stocks) have a higher expected return than “expensive” (highly valued) stocks (so-called growth or growth stocks).
- Quality: Stocks with above-average profitability, growing asset turnover and/or low leverage have a higher statistical expected return than otherwise identical stocks that do not.
- Investment: Stocks with low total balance sheet growth have a higher statistical expected return than stocks with high balance sheet growth.
- Momentum: Stocks with above-average returns in recent months have a higher statistical expected return for a short time afterwards than stocks that have performed poorly during this period.
- Political Risk: Emerging market equities, which are particularly exposed to “political risk”, have a higher statistical expected return than developed market equities (see also our blog post on this).
The aim of overweighting these factor premiums is to generate an excess return (even after taking costs into account) compared to a market-neutral ETF in the long term.
The Gerd Kommer ETF can be described as integrated multi-factor investing, as all these factor premiums are represented in a single index instead of several individual indices. In this way, theoretically possible negative interactions between individual factor premiums are reduced. It also exploits the fact that certain factor premiums have a stronger effect in combination with others than “stand-alone”. This applies, for example, to Size and Value or Size and Quality.
For broad diversification, the factor premiums Size, Value and Quality are achieved by adjusting the respective weightings of the stocks. This is done as part of the quarterly rebalancing, in which the three factors are equally weighted.
With regard to the momentum and investment premiums, we use a special screening technique to keep the securities turnover associated with the use of these two premiums and the transaction costs triggered by it low.
The political risk premium results from the adjustment of the country weightings in the direction of gross domestic product even before optimization.
Factor premiums are volatile, i.e. they fluctuate over time – just like stock returns in general. In other words: Factor premiums are not permanent (i.e. not every month or every year), but can also change from a “bonus” to a “malus” over long periods of time. If factor premiums were continuous (i.e. “guaranteed”), they would have been arbitraged away long ago, i.e. made so “expensive” by strong demand that they would no longer offer any performance advantages.
For readers who want to find out more about factor investing, we have so far written three blog posts at : “Factor Investing – the Basics”, “Integrated Multifactor Investing” and “The Pains of Factor Investing”.
9 High diversification (“ultra-diversification”)
Despite taking into account factor premiums and ESG filters, which tend to reduce the investment universe, there are around 5,000 individual securities in the index (out of around 10,000 stocks in the prime listing standard segments of the stock exchanges in the almost 50 countries included). From these approximately 5,000 single stocks, the Gerd Kommer ETF selects over 4,000 individual securities using an optimized sampling procedure. This figure may rise as the fund volume in the ETF increases. The maximum weighting of an individual stock in the index is limited to a maximum of one percent on each adjustment date, so that “top-heaviness” (a share of more than 10% of the ten largest stocks, which exists in many other ETFs on global stock indices) cannot arise. Due to the special country weighting method described above, there is also better diversification across countries than with conventional equity ETFs.
10 Lightweight sustainability filters
The Solactive Index on which the Gerd Kommer ETF is based contains an ecological filter (screen) with a focus on reducing CO2 emissions. To this end, the top 3 percent of companies in the eleven “key industries” with the highest CO2 emissions are excluded. Furthermore, companies that violate the United Nations’ rules and regulations, have the most severe sustainability violations (“Severe ESG Controversies”), produce controversial weapons and coal producers are excluded. [4]
11 Other specific company exclusion criteria
Scientific research has shown that certain types of shares or share constellations represent statistically unattractive risk-return profiles. This includes the stocks of companies that have only recently had their first IPO (Initial Public Offering) as well as stocks for which the securities lending ratio is very high compared to the market. [5]
12 Securities lending
The Gerd Kommer ETF does not currently (as at June 2023) carry out securities lending with the stocks in the ETF.
13 Index reconstitution date and rebalancing
Every three months, the members and their weighting of the underlying index are recalculated and stocks that no longer meet the index criteria are exchanged for those that now do. Where the other index targets are no longer fully met, this rule-based rebalancing ensures that this is now the case again.
14 Taxation
14.1 Taxation in Germany
The Gerd Kommer ETF is a pure equity fund for regulatory purposes. If the ETF units are held as part of the investor’s private assets, a 30% partial exemption from withholding tax (26.4% including solidarity surcharge and excluding any church tax) applies to the income (dividends and realized capital gains). If the shares are held in a corporation (e.g. GmbH) or in the business assets of a partnership, higher partial exemption rates apply. The ETF is legally domiciled in Ireland and thus benefits from the particularly advantageous double taxation agreement between the USA and Ireland with regard to withholding taxes on dividends from US stocks. ETFs that have their legal domicile (“domicile”) in Luxembourg, France or Germany, for example, do not have this advantage.
14.2 Taxation in Austria
The fund is registered in Austria. Austrian tax reporting will be published for the fund (reporting fund).
14.3 Taxation in Switzerland
The fund is registered in Switzerland and will also be listed on the SIX Swiss Exchange from July. Swiss tax reporting (FTA reporting) will be published for the fund.
15 Regulatory status and investor protection
The Gerd Kommer ETF is a so-called UCITS fund, i.e. an investment fund that is freely licensed for sale to private investors within the EU. The investor funds represent special assets that are legally and infrastructurally separate from the assets of the asset management company (L&G). A bankruptcy of the asset management company would have no adverse effects on the investors’ money. Similarly, the investor bears no bank default risk with regard to the securities account in which the ETF units are held at the investor’s bank, as the bank merely acts as a custodian for securities (this is an important legal difference to a bank account and bank deposits). Furthermore, all regulatory requirements for risk management and investor protection prescribed by the UCITS regulations are applied.
16 Costs
The costs of the ETF (“TER”) amount to 0.50% per year, are already included in the reported return of the ETF and are thus directly offset against the performance, i.e. they automatically reduce the taxable profit.
The costs of the Gerd Kommer ETF are comparable to other multi-factor ETFs or portfolio funds and drastically lower than those of conventional active funds. It can only be compared with ETFs on the MSCI World, for example, to a limited extent, as the Gerd Kommer ETF offers significantly more features and is more complex.
We are convinced that the Gerd Kommer ETFs are fairly priced, as they offer an integrated multi-factor approach, ultra-diversification and an innovative country weighting that takes economic performance into account, which is unique in Germany.
17 Availability
The Gerd Kommer ETF has been listed on XETRA since June 21, 2023 and will be available from all major banks and brokers in Germany and Austria after a few days’ lead time. Investors in Switzerland can already trade the ETF in EUR on XETRA and from the end of July also in CHF on the SIX Swiss Exchange.
18 Savings plan eligibility
The ETF will be eligible for savings plans with several providers.
19 Minimum investment amount
There is no minimum investment amount.
20 Further information
The ETF website (https://backup2.gerd-kommer.de/etf/) contains further marketing information. All legal information including the fund prospectus and the key investor information document (KID) can be found on the website of the fund operator L&G. Please read these documents before making a final investment decision. Anyone interested in the technical structure of the index can find all the details in the index methodology (Index Guideline).
Conclusion
The L& G Gerd Kommer Multifactor Equity UCITS ETF is a convenient and efficient solution for implementing Dr. Gerd Kommer’s world portfolio concept in a 1-ETF solution – possibly together with an interest-bearing bank deposit or a bond ETF to represent the low-risk world portfolio part, if this is desired.
With the Gerd Kommer ETF, the investor is spared the initial search and selection of individual ETFs, and the periodic rebalancing work after the initial set-up. The investor also has the certainty that the world portfolio concept has been implemented by experts in the factor investing variant.
With the Gerd Kommer ETF, you can start from any investment amount and/or conveniently accumulate assets on a monthly basis via an ETF savings plan.
Endnotes
[1] “GBS” stands for Global Benchmark Series, “NTR” for Net Total Return, “ISIN” for International Security Identification Number.
[2] Anyone comparing the returns of different funds or indices should ensure that the currency (usually USD for indices, usually EUR for ETFs in the eurozone) is identical for all return figures in the comparison. You should also ensure that dividends are consistently taken into account everywhere (total return indices) and check whether any withholding taxes have been deducted from the dividends (net total return index variant versus gross total return index variant). The Solactive Index mentioned here is a net total return index. As a rule, equity ETFs refer to these.
[3] The term “market-neutral” is not used here in the same sense as in academic financial economics, but in the sense of a neutral orientation towards the weighting of stocks, which is based purely on their market capitalization.
[4] “ESG” stands for Environmental, Social, Governance in the context of sustainability criteria.
[5] For example, the Wirecard stock would have been excluded from the index using this criterion before its final crash.
Investment books by Gerd Kommer
Der Leichte Einstieg in die Welt der ETFs. Unkompliziert vorsorgen – ein Starterbuch für Finanzanfänger; Finanzbuch Verlag 2022; 180 pages
Souverän investieren für Einsteiger. Wie Sie mit ETFs ein Vermögen bilden; Campus Verlag 2023 (2nd edition); 270 pages
Souverän investieren vor und im Ruhestand. Mit ETFs Ihren Lebensstandard und Ihre Vermögensziele sichern; Campus Verlag 2020; 330 pages
Souverän investieren mit Indexfonds und ETFs. Wie Sie das Spiel gegen die Finanzbranche gewinnen; Campus Verlag 2018 (5th edition); 415 pages
Souverän Vermögen schützen – Wie sich Vermögende gegen Risiken absichern – ein praktischer Asset Protection-Ratgeber (with co-author Olaf Gierhake); Campus Verlag 2021; 410 pages