Relevance of Exchange Traded Funds for Conservative Investors to Achieve Real Capital Preservation During Policy of Low Interest Rates

Bachelor Thesis , 2015 , 64 Pages , Grade: 2,0

Business economics - Investment and Finance

Introduction of exchange traded funds for conservative investors to achieve real capital preservation.

The world of money investment offers various possibilities for all kinds of investor to achieve personal financial goals. Institutional investors, such as hedge funds, insurances and asset managers, pursuit maximum profit for satisfaction of client
expectations. In contrast, private investors concentrate on personal goals, for instance, retirement arrangements, inheritance or material wishes. Nearly €4.5 trillion are the total savings of German private households. From classic savings accounts up to capital investments in stock or bond market, investors are spoilt for choice.

However, recent global financial events lead to the necessity of rethinking prevailing investment choices. Especially conservative investors with emphasis on low-risk investments suffer from the present investment landscape marked by low
interest rates. They prefer investments in bank deposit accounts and avoid possible alternatives. 25% of all German private investors follow that idea of full security.

But the recent ECB statement from April 2015 underlines the continuation of the policy of low interest rates. Due to the American model, key interest rate remains low at 0.05%. In addition, monthly purchase programmes of public and private
securities in the amount of €60 billion are executed. Hence, seeking new investment alternatives are the conclusion for savers. By way of example, dividends can be the new interests for conservative investors. The utilization of investment chances on the stock market can be a profitable solution for real return achievement and at last capital preservation. Despite the existing investment risk, it offers manifold ways to achieve winnings. On account of this, conservative investors need elaboration for approaching the stock market as effectively as possible to keep the risks and potential losses marginal. Discovering the personal most suitable investment strategy with the according mindset determines the success rate. This also implies to know the own willingness for taking risks. According to stock market expert André Kostolany, it is important to not allow emotions affect rational investment decisions.

Inhaltsverzeichnis (Table of Contents)

• 1. INTRODUCTION.
• 1.1 Problem Description
• 1.2 Objectives.
• 1.3 Scope of Work.
• 2. RECENT FINANCIAL INVESTMENT ENVIRONMENT.
• 2.1 Monetary Policy Measures of European Central Bank......
• 2.2 Coherence of Inflation, Deflation and Money Investment..
• 2.3 Deduction for Investment Decisions.
• 3. FUNDAMENTALS OF CONSERVATIVE INVESTING
• 3.1 Investment Principles
• 3.1.1 Mindset Towards Safety and Risk...
• 3.1.2 Investment Objective
• 3.1.3 Time Horizon...
• 3.1.4 Pricing.
• 3.1.5 Choice of Investments..
• 3.2 Distinction From Balanced Investors.
• 3.3 Distinction From Aggressive Investors ..
• 4. AN INTRODUCTION TO EXCHANGE TRADED FUNDS.
• 4.1 History and Development
• 4.2 Definition and Characteristics.
• 4.3 Differentiation from Mutual Funds…..........\li>
  • 4.3.1 Management Technique .....
  • 4.3.2 Stock Exchange Trading.
  • 4.3.3 Cost Structure.
  • 4.3.4 Transparency
• 4.4 Index Tracking Techniques.....
• 4.4.1 Full Physical Replication.
• 4.4.2 Partial Physical Replication.........
• 4.4.3 Swap-Based Synthetic Replication
• 4.5 ETF Types.
• 4.5.1 Bond ETF
• 4.5.2 Money Market ETF.
• 4.5.3 Commodity ETF.
• 5. EVALUATION FOR CONSERVATIVE INVESTORS...
• 5.1 Change of Investment Mindset....
• 5.2 Performance Analysis
• 5.2.1 Interest Development of Savings Accounts in Germany......
• 5.2.2 Performance of ETFs Tracking the German Stock Market.
• 5.2.3 Evaluation of Performance Results.......
• 5.3 Pricing Analysis .....
• 5.4 Generic Investment Chances.
• 5.4.1 Diversification with Reasonable Pricing
• 5.4.2 High Liquidity Through Trading Flexibility.
• 5.4.3 Investment Transparency.....
• 5.5 Generic Investment Risks....
• 5.5.1 Volatility in Underlying Indexes
• 5.5.2 Inflexible Fund Holdings
• 5.5.3 The Right Choice.
• 6. RECOMMANDATIONS FOR APPROACHING ETF INVESTMENTS .........
• 6.1 Determination of Investment Type and Risk Disposition .....
• 6.1.1 Lump Sum..........\li>
• 6.1.2 Savings Plan..\li>
• 6.2 Definition of Investment Time Horizon.........
• 6.3 Tracking of Underlying Index.
• 6.4 Choice of ETF Investment Company.
• 6.5 Identifying Cost-Efficient ETFs.
• 7. CONCLUSION.......
• 7.1 Target Achievement...
• 7.2 Prospects…......

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This bachelor thesis aims to investigate the relevance of Exchange Traded Funds (ETFs) for conservative investors seeking real capital preservation during the period of low interest rates. The study focuses on the investment characteristics of ETFs, analyzing their suitability for investors with a risk-averse profile. It examines the potential benefits and challenges of using ETFs as a tool for capital preservation in a low-interest rate environment.

• Conservative investment strategies in a low-interest rate environment
• Characteristics and benefits of Exchange Traded Funds (ETFs)
• Performance analysis of ETFs for capital preservation
• Risk assessment and mitigation strategies for ETF investments
• Recommendations for approaching ETF investments for conservative investors

Zusammenfassung der Kapitel (Chapter Summaries)

• Chapter 1: Introduction: This chapter outlines the problem statement, research objectives, and scope of the thesis. It highlights the challenges faced by conservative investors in a low-interest rate environment and sets the context for exploring the potential of ETFs as a viable investment strategy.
• Chapter 2: Recent Financial Investment Environment: This chapter examines the prevailing economic and financial conditions that influence investment decisions, including the monetary policy measures of the European Central Bank and their impact on inflation, deflation, and investment opportunities.
• Chapter 3: Fundamentals of Conservative Investing: This chapter defines the core principles and characteristics of conservative investing, including risk tolerance, investment objectives, time horizon, and investment selection criteria. It also differentiates conservative investors from balanced and aggressive investors.
• Chapter 4: An Introduction to Exchange Traded Funds: This chapter provides an overview of ETFs, covering their history, definition, characteristics, and differentiation from mutual funds. It discusses various index tracking techniques used by ETFs, such as full physical replication, partial physical replication, and swap-based synthetic replication. The chapter also explores different types of ETFs, including bond, money market, and commodity ETFs.
• Chapter 5: Evaluation for Conservative Investors: This chapter examines the suitability of ETFs for conservative investors, evaluating their potential benefits and risks. It analyzes performance data of ETFs tracking the German stock market and compares them to the performance of traditional savings accounts. The chapter also explores the advantages of ETFs for conservative investors, such as diversification, liquidity, and transparency, while highlighting potential risks related to underlying index volatility, inflexible fund holdings, and the importance of making informed investment decisions.
• Chapter 6: Recommendations for Approaching ETF Investments: This chapter provides practical recommendations for conservative investors seeking to incorporate ETFs into their portfolios. It addresses key considerations, such as investment type, risk disposition, time horizon, choice of ETF investment company, and identifying cost-efficient ETFs.

Schlüsselwörter (Keywords)

This bachelor thesis focuses on the concept of conservative investing, specifically in the context of low interest rates. The main keywords include Exchange Traded Funds (ETFs), capital preservation, risk aversion, investment strategy, performance analysis, and portfolio diversification. The study examines the suitability of ETFs for conservative investors and explores the potential benefits and risks associated with this investment approach.

• College: University of Applied Sciences Essen
• Grade: 2,0
• Author: Bachelor of Arts (B.A.) Cam-Duc Au (Author)
• Publication Year: 2015
• Pages: 64
• Catalog Number: V384500
• ISBN (eBook): 9783668594869
• ISBN (Book): 9783668594876
• Language: English
• Tags: ETF, Exchange Traded Funds, Policy of Low Interest Rates, ECB, Capital Preservation, Financial Repression, Conservative Investors, Investments