What is ETF-Free Fidelity

The crazy ETF hype from Trade Republic and Co.

These are very unusual times. While German savers have traditionally been decried as savvy bookers, change is currently happening like a landslide. The Germans are suddenly becoming a people of fund savers - driven by discount brokers such as Trade Republic and Co .. The boom is causing some crazy exaggeration.

What sparked the ETF hype

The recent stock hysteria is no coincidence. It was actually thought that after the dot-com bubble burst at the turn of the millennium, Germans would never buy shares again. But the past year 2020 should teach all spectators wrong. Investors: banks, savings banks and online brokers are running down the doors and buying as if there was no tomorrow. The focus is on an ETF hype that brings back bad memories.

The rally on the capital markets is currently being driven primarily by two factors. On the one hand, there are the key interest rates, which the major central banks keep artificially low (sometimes even negative). They are the guideline by which banks and bond issuers in turn align their interest rates for savers and investors. In the aftermath of the financial crisis, the national debt crisis and now the Corona crisis, the central banks are thus protecting the nation states from national bankruptcy.

On the other hand, there are the various lockdown measures taken by governments in the context of the corona pandemic. They ensure that people cannot spend their money as usual in retail stores, cinemas, restaurants and bars. The money saved is currently increasingly going to the stock markets because the overnight money account no longer pays any interest.

And because direct investments in individual stocks are risky, investors rightly rely on funds. And in the last few years more and more low-cost ETFs, which are passively managed and simply stubbornly replicate a certain stock index.

What role do Trade Republic & Co. play

Young investors: from generations Y and Z are relying heavily on online brokers and, recently, they have been growing strongly on discount brokers such as Trade Republic (here in the test) and Scalable Capital** or Smartbroker **. These fintechs have taken the US free broker Robin Hood as a model. They all enable shares to be traded at extremely low fees - and convince the young target group with their contemporary communication and user experience.

As a rule, discount brokers offer ETF savings plans that are completely free of charge - while traditional, actively managed investment funds from banks and savings banks can quickly add up to 3 - 5% issue surcharge and other management fees. For young people who grew up with the free culture of the internet, the choice is now clear. And so they invest their money in the various ETFs month after month through Trade Republic and Co.

That's basically a good thing. After all, independent financial experts have long recommended low-cost asset accumulation via ETFs. However, the investment habits of the new generations are causing considerable distortions in the markets. As DIE WELT recently reported, new investors are guided less by numbers than by brands. And that has an impact.

When the hype fuels the hype

Such an exaggeration is relatively easy to spot in stocks. You can see that very clearly at the Tesla rally. The brand of the charismatic founder Elon Musk has a reputation among younger people like Donnerhall. Accordingly, they are pushing into the stock, which breaks one record after the next. And the more the price rises, the more is bought. The hype feeds the hype. There is FOMO, the "fear of missing out" - the fear of missing out on something.

At the time of this writing, Tesla is valued at just under 660 billion euros on the stock exchange. This corresponds to the market value of SAP, Linde, Siemens, Allianz, Volkswagen, Deutsche Telekom and BASF combined. After all, the seven most valuable German stocks currently. Or put another way: about 650 times the profit expected for 2020. An absurdly high rating even for growth stocks.

The crazy hype about green ETFs

Something similar is happening in the field of ETFs. And against the background of #FridaysForFuture, preferably with funds that invest in “green” technologies. However, the exaggerations are not apparent at first glance, although some price rallies should make you suspicious here too. I experienced this myself, for example, with the “iShares Global Clean Energy UCITS ETF USD” from Blackrock, which is actively traded at Trade Republic.

The massive price increases over the year are already very noticeable. At the latest when you look at the price development over the entire term of the fund. For several years, the price of the ETF fluctuated between 4 and 5 euros. With Fridays for Future came the first run, which was suddenly stalled by Corona in March. What followed was a stock market fairy tale that hardly needs to hide behind the Tesla hype (see the charts).

Now you could say that green energy is also the future. Correct, but it is worth taking a closer look at the fund's portfolio. Siemens Gamesa is the only name among the ETF positions that is known to the general public. Industry experts should also say something about the supplier Verbund AG, the wind turbine manufacturer Vestas and First Solar. The remaining investments are probably only known to a few.

The combination of high capital inflows into the ETF in combination with the previously very manageable market values ​​of the fund's main positions is problematic. According to iShares, the fund had a total volume of almost USD 6.5 billion as of January 15, 2021. Before the big rally since March 2020, however, most of the holdings had market values ​​of well below USD 10 billion.

Plug Power illustrates the ETF hype

This is particularly evident in the largest fund position, the US hydrogen specialist Plug Power. As of March 16, 2020, the share price was EUR 2.68 and the market value was just EUR 1.25 billion. In the meantime, the price has increased almost nineteen-fold to 49.73 euros and the market value is 23.2 billion euros.

Of course, hydrogen is currently very much in vogue for e-mobility. However, the share price rise is likely to be largely due to a self-reinforcing chain that virtually provokes bubbles. This particularly applies to narrow markets, which suddenly have a lot of liquidity flowing into them.

At the beginning, a lot of new money flows into the ETF because the topic is well received by the young target group. The fund must use this money to purchase the corresponding shares (or derivatives on it) and thus ensure increased demand for these shares. These initially have a comparatively low market capitalization and the range is accordingly manageable. The sudden strong excess demand causes a noticeable rise in the price of the relevant share (s). As the share price rises, so does the value of the fund units. This in turn makes the fund attractive to more people, more money flows into the fund and the cycle starts all over again with even more momentum.

So the hype feeds the ETF hype. The new fintech brokers are liberating this trend even more than it was before their time. For example, Trade Republic shows popular ETFs on its search overview page and thus draws its customers' attention to funds that are currently already heavily traded. In this way, they channel system flows and become a fire intensifier - in one direction or the other.

Unsurprisingly, “iShares Global Green Energy” has been at the top of this list for a long time. Fintech encourages its users to take a closer look at this ETF. The steep historical performance should then move quite a few to buy. Even if common sense is ringing the alarm bells here: the FOMO should still win in many cases. And the ETF hype continues.

Are we threatened with Dotcom 2.0?

As already written at the beginning, the current situation reminds at least the elderly among us a lot of the time around the turn of the millennium. There, too, it was about new, world-changing technology. Back then, too, the prices of such companies rose rapidly and almost incessantly. People who had remained loyal to their savings accounts up until then suddenly flooded the stock exchanges.

At that time, Germany seemed to be building something like a “share culture” for a short time, which is particularly widespread in the Anglo-American world. At that time, however, the "stupid money" inflated a huge speculative bubble, the bursting of which has blown away hundreds of billions of euros in invested assets. And wreaked havoc on the burgeoning stock culture.

It has not been said that it has to come to this this time, even if there are some warning signs that speak for it. Today, as then, there is a gold rush atmosphere and many poorly informed new investors are rushing to the markets. Prices of hyped stocks rise to absurd valuations, always in the hope that the steep upward trend will continue. In addition, thanks to Trade Republic and Co., it is easier than ever to get involved in the capital market. And often without human advice that warns you of the dangers (positive exception: Scalable Capital offers an ETF advisor** and webinars** for those interested in).

In addition, there is the great uncertainty caused by the corona pandemic, which, depending on further developments, has the potential to swirl prices massively. The only bright spot at the moment are the international central banks. Due to the ongoing low interest rate policy, they are pushing people from the overnight money account to the capital markets. At the same time, however, they are flooding the market with liquidity and are now even taking action as buyers of stocks. The hope for investors could therefore be that they will provide help even if the bubble bursts. A moral hazard of the first order, but unfortunately not without an example in recent history.

Conclusion

The current ETF hype on the capital markets is reinforced by the young discount brokers. This is causing worrying undesirable developments in some market segments and is fueling concerns about a bubble that could burst. Hope rests on the central banks, which could play the fire brigade if the worst comes to the worst.

Takeaway for banks and savings banks
Discount brokers' strengths could become their weaknesses if the bubble bursts: there is no advice on how investors should act inside. This can be a great opportunity for banks and savings banks with a strong advisory capacity to make the right decisions in personal discussions with good advice. The prerequisites for this are highly trained consultants and high availability, including via digital / media channels.


** The links marked with an asterisk (**) are so-called affiliate links. If you click on such an affiliate link and shop via this link, I will receive a commission from the online shop or provider concerned. For you the price doesn't change.

Posted in Opinion and tagged ETF, FinTech, Investment, Trade Republic.