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From Daniel Chancellor and Alexander Weis
If you're interested in ETFs in German-speaking countries, there's one person you can't ignore: Dr. Gerd Kommer. He has been writing advice books on the subject of “investing with index funds and ETFs” for 23 years and has been working in the financial industry for 30 years. Gerd Kommer popularized forecast-free and rule-based investing based on established scientific findings in the private investor market in the DACH countries and coined the term “global portfolio” for it. This investment approach, which can be implemented with ETFs, has become increasingly known in the private investor scene in German-speaking countries in recent years due to its convincing concept, its long-term attractive return expectations and its easy implementation - occasionally under similar names such as "Weltdepot" or "Welt-AG" and in slightly modified forms of implementation.
The global portfolio is not a fixed compilation of specific ETFs or securities indices, but rather 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 the 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 out of the desire to delegate important investment decisions to an expert temporarily or in the long term.
In order to simplify setting up a world portfolio for those interested private investors who do not want to put together 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 offer wealthy households, foundations and small companies in German-speaking countries comprehensive support including holistic financial advice with 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 ours Robo advisor strategy, which launched in October 2020. With a robo advisor, i.e. digital asset management, the investor is initially responsible for determining risk tolerance and selecting individual ETFs, as well as screening (searching and selecting) new ETFs and rebalancing during ongoing operations. With our RObo Advisor strategy you can invest from a starting amount of 25 euros. The costs of a robo solution are naturally higher than in DIY mode.
Since June 2023 we have had a solution for DIY investors: 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 key investor information before making a final investment decision.
1 Basic Features
The Gerd Kommer ETF is a pure stock ETF that represents the risky portfolio part of the world portfolio concept in a single fund, i.e. a “1-ETF solution”. “Risky portfolio part” here means “global stock market”. In our opinion, anyone who wants to invest in the form of a highly return-oriented “100/0 level 1 asset allocation” (100% risky/0% low risk) does not 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 only cover short remaining terms of debtors with a high credit rating in the investor's home currency. For risk reasons, the balance in the current account should not exceed 100,000 euros, the upper limit of the state deposit insurance in Germany.
2 investment company (KVG)
The Gerd Kommer ETF is provided by the ETF provider Legal & General Investment Management (“L&G”) managed. 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. As of December 2022, the assets managed by L&G are worth around 1,300 billion euros. 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 created by Dr. Gerd Kommer and team in collaboration with the Solactive AG and L&G developed in 2022 and 2023. Solactive is a German index provider based in Frankfurt. The parent index underlying the index is called Solactive GBS Global Markets Investable Universe USD Index NTR (ISIN: DE000SL0EM79) and the index underlying the Gerd Kommer ETF Solactive Gerd Kommer Multifactor Equity Index NTR (ISIN: DE000SL0G219). [1] The index reflects the global stock market, the “Welt-AG”, so in principle it is roughly comparable to a stock ETF on the well-known MSCI ACWI index. However, the Gerd Kommer ETF deliberately and clearly deviates from an MSCI World ETF in some important points described below. [2]
4 “All-Cap-All-Market Principle”
In the Gerd Kommer ETF - unlike in an MSCI World ETF - in more regional Dimension also includes emerging market stocks; in the Size dimension also small caps (secondary stocks). The ETF can therefore be referred to as an “all-cap all-market ETF” that reflects the entire world stock market. In the MSCI World, however, emerging market stocks and small caps are not taken into account.
5 country weighting
The Gerd Kommer ETF covers almost 50 countries (compared to 23 for an MSCI World ETF [as of 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 output). For example, the cluster risk in the USA, which we see in the MSCI World Index (as of June 2023, the USA has over 67% weight), is significantly reduced. In return, emerging markets and the majority of non-US industrialized countries are weighted higher. (This YouTube video goes into more detail about the differences in region weightings and this one 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 using optimized sampling in order to keep the costs in the fund as low as possible.
7 Use 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 about the respective advantages and disadvantages of distributing and accumulating ETFs, you can do so via our Blog post do.
8 factor investing
The Gerd Kommer ETF is a Multifactor ETF, which overweights so-called “factor premiums” compared to a market-neutral (“plain vanilla”) passive equity index. [3] Factor investing is also under the name Smart beta investing known. Factor premiums are characteristics of stocks identified by science that have a systematic, statistical relationship with return and risk and whose overweighting in a stock portfolio is intended to generate additional returns in the long term compared to a market-neutral portfolio. 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 stocks of large companies.
- Value: Stocks whose price is low relative to certain business metrics (e.g. profit or book equity) have a higher statistical expected return than otherwise identical stocks where this is not the case. In other words: “cheap” stocks (value or intrinsic 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 capital turnover and/or low debt levels have a higher statistical expected return than otherwise identical stocks where this is not the case.
- Investment: Stocks with low balance sheet growth have a higher statistical expected return than stocks with high balance sheet growth.
- Momentum: Stocks with above-average returns in the last few months have a higher statistical expected return for a short period of time than stocks that have had poor returns during this period.
- Political risk: Emerging market stocks, which are particularly exposed to “political risk”, have a higher statistical expected return than developed market stocks (see also our Blog post on this).
The aim of overweighting these factor premiums is to generate additional returns in the long term (even after taking costs into account) compared to a market-neutral ETF.
You can use the Gerd Kommer ETF from integrated Talk about multifactor investing because all of these factor premiums are rolled into one individual Index are mapped instead of in several individual indices. In this way, theoretically possible adverse interactions between individual factor premiums are reduced. In addition, it is exploited in such a way that certain factor premiums have a stronger effect in combination with others than “standalone”. This applies, for example, to Size and Value or Size and Quality.
Factor premiums provide broad diversification Size, Value and Quality achieved by adjusting the respective weights of the shares. This happens as part of the quarterly rebalancing, in which the three factors are weighted equally.
Regarding the rewards Momentum and Investment We use a special screening technique to keep the securities turnover (turnover) associated with the use of these two bonuses and the transaction costs that this in turn triggers low.
The political risk premium results from adjusting the country weights towards gross domestic product before optimization.
Factor premiums are volatile, i.e. h. they fluctuate over time – just like stock returns in general. In other words: factor premiums do not appear permanently (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 arbitrated away long ago, i.e. h. had been made so “expensive” due to strong demand that they would no longer offer any return advantages.
For readers who want to find out more about factor investing, we have so far written three blog posts: “Factor investing – the basics”, “Integrated Multifactor Investing” and “The Pains of Factor Investing”.
9 High diversification (“ultradiversification”)
Despite taking into account factor premiums and ESG filters, which tend to reduce the investment universe, there are around 5,000 individual stocks in the index (out of around 10,000 stocks in the Prime Listing Standard segments of the stock exchanges in the almost 50 countries taken into account). From these approximately 5,000 individual stocks, the Gerd Kommer ETF selects over 4,000 individual stocks using an optimized sampling method. This number can increase as the fund volume in the ETF increases. The maximum weight of an individual stock in the index is limited to a maximum of one percent on each adjustment day, so that “top-heavyness” (a share of over 10% of the ten largest stocks, which exists in many other ETFs on global stock indices) cannot arise. The special country weighting method described above also provides better diversification across countries than with conventional stock ETFs.
10 Lightweight Sustainability Filters
The Solactive index on which the Gerd Kommer ETF is based includes an ecological filter (screen) with a focus on reducing CO2-emissions. To do this, the top 3 percent of companies in the eleven “main sectors” with the highest CO2-Emissions excluded. Companies that violate United Nations regulations, have the most serious sustainability violations (“Severe ESG Controversies”), produce controversial weapons and coal manufacturers are also excluded. [4]
11 Further specific company exclusion criteria
Scientific research has shown that certain types of stocks or stock constellations represent statistically unattractive risk-return combinations. This includes shares of companies that only recently had their first public offering (IPO/Initial Public Offering) as well as shares for which the securities lending rate is very high compared to the market. [5]
12 Securities Lending
The Gerd Kommer ETF does not currently (as of June 2023) carry out any securities lending with the shares 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 replaced with those that do. Where the other index requirements are no longer fully met, this rule-based rebalancing ensures that this is now the case again.
14 Taxation
14.1 Taxation in Germany
From a regulatory perspective, the Gerd Kommer ETF is a pure equity fund. If the ETF shares are held as part of the investor's private assets, then there is a 30% partial tax exemption for withholding tax (26.4% including solidarity surcharge and excluding any church tax) in relation to the income (dividends and realized price 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 has its legal headquarters in Ireland and therefore 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 headquarters (“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 (ESTV 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 permitted for distribution to private investors within the EU. The investor funds represent a special fund that is legally and infrastructurally separate from the assets of the fund company (L&G). A bankruptcy of the fund company would have no adverse impact on investor funds. Likewise, the investor does not bear any bank default risk with regard to the securities account in which the ETF shares are kept at the investor's bank, since the bank only acts as a custodian for securities held in the securities account (here there is an important legal difference to a bank account and bank deposits). Furthermore, all regulatory requirements for risk management and investor protection that the UCITS regulations stipulate apply.
16 costs
The costs of the ETF (“TER”) amount to 0.45% per year, are already included in the ETF’s reported return and are therefore offset directly against the performance, i.e. h. they automatically reduce the taxable profit.
The costs of the Gerd Kommer ETF are comparable to other multifactor ETFs or portfolio funds and dramatically lower than those of conventional active funds. It can only be compared to a limited extent with ETFs on the MSCI World, for example, because the Gerd Kommer ETF offers significantly more features and is more complex.
We are convinced that we can offer fair pricing for the Gerd Kommer ETF because, in addition to an integrated multifactor approach and ultra-diversification, it offers 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 is available from all common banks and brokers in Germany and Austria. Investors in Switzerland can trade the ETF in EUR on the XETRA and in CHF on the SIX Swiss Exchange.
18 Savings plan eligibility
The ETF is eligible for savings plans with most providers.
19 Minimum investment amount
There is no minimum investment amount.
20 Further information
On the ETF website (https://gerd-kommer.de/etf/) you can find further marketing information. All legal information including the fund prospectus and the key investor information (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 English language version Index methodology (Index Guidelines).
Conclusion
The L&G Gerd Kommer Multifactor Equity UCITS ETF is a convenient and efficient solution, the world portfolio concept from Dr. Gerd Kommer in a 1-ETF solution - if necessary 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, investors save themselves the initial search and selection of individual ETFs and, after the initial set-up, the periodic rebalancing work. 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 with any investment amount and/or conveniently build assets every month using 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 who compares the returns of different funds or indices should make sure that the currency (usually USD for indices, usually EUR for ETFs in the euro area) 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. Stock ETFs usually refer to these.
[3] The term “market neutral” is not used here in the same sense as in academic financial economics, but rather in the sense of the neutral orientation towards the weighting of stocks, which results purely from their market capitalization.
[4] “ESG” stands for sustainability criteria Environmental, Social, Governance.
[5] For example, the Wirecard share would have been excluded from the index using this criterion before it finally crashed.
Investment books by Gerd Kommer
The easy entry into the world of ETFs. Prepare for things uncomplicatedly – a starter book for financial beginners; Financial Book Publisher 2022; 180 pages
Invest confidently for beginners. How to build wealth with ETFs; Campus Verlag 2023 (2nd edition); 270 pages
Invest confidently before and during retirement. Secure your standard of living and your wealth goals with ETFs; Campus Publishing 2020; 330 pages
Invest confidently with index funds and ETFs. How to win the game against the financial industry; Campus Verlag 2018 (5th edition); 415 pages
Protect assets confidently - How wealthy people protect themselves against risks - a practical asset protection guide (with co-author Olaf Gierhake); Campus Publishing 2021; 410 pages