You sit down to check your brokerage depot (investment account), coffee in hand, ready for your monthly dose of German financial order. Your ETF-Sparplan (savings plan) dutifully transferred another chunk of cash last night into the MSCI World ETF. It feels safe, predictable, and logical. But a nagging thought whispers from the back of your mind, fueled by headlines from Shanghai and Mumbai: Are you missing out on the rest of the world?
It’s the classic German Sparplan conflict: the pragmatic, stable, developed-world investor versus the restless, yield-chasing global speculator. On one hand, you have the allure of capturing the entire world’s growth, including the economic dynamism of the Schwellenländer (emerging markets). On the other, the cold, hard “Fakten” (facts) reminding you that over the last decade and a half, dumping money into EM would have actively held you back.
So, as you adjust your Riester-Rente (Riester Pension) contributions and ponder your Lohnsteuer (wage tax) declaration, do you keep it simple with your core developed index, or complicate your life with a second, more volatile ETF?
The Siren Song of “True” Diversification
The argument for adding EM sounds unimpeachable. Financial dogma and many financial advisors preach broad diversification. The world market isn’t just the US, Europe, and Japan, it includes giants like China, India, Taiwan, and Brazil, which together account for a significant slice of the global economy. By sticking solely to an MSCI World (which covers only developed markets), you’re telling those economies, and their millions of rising consumers, “I don’t believe in your future.”
The promise is one of uncorrelated returns and higher growth. As one investor recently articulated, adding EM assets to the portfolio can be a way to “compensate for the slow growth of developed markets while accessing high-volatility, high-return regions.” The demographic story is powerful: younger populations, stronger GDP growth forecasts. It’s a bet on the next cycle.
There’s also the “regression to the mean” argument. The US has had an unbelievable run, boosted by the “Magnificent Seven” tech stocks. Performance-wise, it’s been the only game in town for a decade. But can it last forever? Skeptics point to Japan’s fate in the 1990s, a dominant economy that plateaued for decades. By ignoring EM, you’re essentially making a concentrated bet that US dominance continues unchallenged.
The Counterargument: Performance, Politics, and Simplicity
Now tell that to the German investor who lived through the last 15 years. For a very long stretch, their simple MSCI World Sparplan crushed any diversified portfolio that included EM. Every hypothetical Euro allocated to Emerging Markets was a Euro not invested in the soaring American tech giants, and it actively dragged down returns. The numbers don’t lie.
When confronted with this historical fact, a common reaction from the pro-EM crowd is to question the timeframe. Why cherry-pick the last 15 years? A look at a longer backtest, like this one comparing a global index, shows periods where EM strongly outperformed. The pro-argument then becomes about future-looking, unemotional, market-cap-weighted portfolio construction, not performance-chasing.
But the German investor’s hesitation is deeper than recent performance. It’s often rooted in concrete risk concerns:
- Geopolitical Risk: The single biggest weight in any major EM index is China. The Taiwan issue isn’t an abstract political debate, for many investors, it represents a tangible, existential risk to nearly 35% of some EM ETF holdings. As one skeptic put it, in a conflict scenario, EM holdings could be “futsch” (lost).
- Governance and Market Access: A larger hurdle is skepticism about the market structures themselves. Are Chinese companies truly independent of state influence? Can you trust the corporate governance in some EM countries? Even MSCI’s classification baffles many, why is tech powerhouse South Korea still considered an “Emerging Market”? It highlights the arbitrariness of the category.
- Simplicity: The cornerstone of the Gießkannenprinzip (watering can principle) beloved by German forums like r/Finanzen is a simple, set-and-forget strategy. Adding a second ETF means rebalancing, managing two flows of dividends, and questioning your allocation every time China makes a geopolitical move. It introduces complexity and doubt, the sworn enemies of the disciplined Sparplan investor.
The “Ex-China” Compromise and Other Paths
For those convinced by the diversification logic but scared of Beijing, there’s a middle path: EM ETFs that exclude China. This lets you invest in the growth stories of India, Taiwan, South Korea, and Brazil while sidestepping the direct CCP risk. It’s a cleaner, more targeted bet on development and demographics, though it still carries currency and political risks.
Alternatively, you could skip the philosophical debate entirely and just buy a single ETF that holds everything. Funds like Vanguard’s Total International Stock ETF own nearly 8,800 stocks across both developed and emerging markets in one package, weighted by market cap. It’s the ultimate “shut up and take my money” diversification approach, though you surrender the ability to tweak your EM weighting and pay for exposure whether you want it or not.
Even within the EM category, your choice matters immensely. For example, the Schwab Emerging Markets Equity ETF (SCHE) and the iShares Core MSCI Emerging Markets ETF (IEMG) paint different pictures despite tracking similar universes. As a recent analysis highlighted, SCHE leans heavier into Chinese tech platforms like Tencent and Alibaba, while IEMG has greater exposure to Korean semiconductor giants like Samsung and SK Hynix. Your EM allocation isn’t just a bet on “foreign growth”, it’s a specific bet on either Chinese consumer tech or the hardware cycle fueling it.
Navigating Your Own Sparplan-Crossroads
So, how do you, sitting with your German brokerage login, decide?
First, examine your own mental makeup. Can you watch an EM ETF plummet 35%, as they have in the past, and not panic-sell? Adding EM is a volatility injection. If you’re the type to log into your depot daily and fret over swings, stick with your MSCI World.
Second, be honest about your time horizon. The arguments for EM are decades-long demographic shifts, not next-quarter earnings. If your investment horizon is shorter than 20 years, the extra risk might not be worth the potential, and long-delayed, reward.
Third, consider a “core-satellite” approach. Keep 80-90% of your portfolio in your simple, low-cost MSCI World (or FTSE Developed World) ETF as the solid, reliable core. Then, allocate a small, fixed percentage (say, 5-10%) to an EM ETF through a separate Sparplan. This satisfies the diversification itch without gambling your primary strategy. It also forces you to buy more when EM is down, a classic contrarian move.
And just like you might not realize the hidden concentration risks in MSCI World ETFs, maybe your hesitation about EM is less about logic and more about comfort. Both sides have strong, well-reasoned arguments. The “keep it simple” crowd has history and lower stress on its side. The “global diversification” crowd has economic theory and long-horizon potential on theirs.
Ultimately, there’s no perfect answer. But the worst move is to bounce back and forth, adding EM after a good year, selling it after a bad one. The real assessing risk tolerance for investment horizons isn’t about the product, it’s about you. Pick a strategy, automate your Sparplan, and then do your best to forget about it. That, ironically, might be the most German solution of all.