ETFs are an easy way to build up long-term assets - even for your child. With an ETF savings plan, you can invest regularly, diversify broadly and benefit from low costs. If you start early, even a small monthly amount can have a noticeable effect over many years. The prerequisite is that you understand the basic functions and framework conditions of this form of investment.
In this article, you will find out how ETFs work, what you should look out for when choosing them and how to set up a custody account for your child.
We'll help you find the right investment for your child!
What is an ETF? - Simple and understandable for beginners
An ETF is an exchange-traded fund. The abbreviation is based on the English term for this German translation: Exchange Traded Fund. Such a fund pools the money of many investors and invests it automatically in a large number of securities - usually shares.
What makes ETFs special is that they replicate an index, i.e. a specific market or market segment. A classic example is the MSCI World, a global share index with over 1,500 companies from industrialized countries. An ETF on the MSCI World attempts to replicate this index as closely as possible - not by actively selecting individual shares, but through an automatic, rule-based composition.
You can think of an ETF like a large shopping basket: Instead of buying individual shares, with an ETF you invest in many companies at the same time. This reduces the risk as you are not dependent on the performance of a single company. Losses from a single share in the basket are offset by gains from other companies. This spreading of risk is also known as diversification.
As the name suggests, ETFs are traded on the stock exchange - just like shares. This means you can buy or sell them daily. Unlike traditional investment funds, which are actively managed by fund managers, ETFs work passively. This saves costs - and these savings are passed on directly to you.
However, this also means that there is no manager behind it who keeps an eye on the stock market at all times and makes the most advantageous adjustments. Like any financial product, ETF savings plans therefore have advantages and disadvantages for investors and should always be selected based on your savings goal. In this case, its security and steady but comparatively low performance speak in favor of using exchange-traded index funds as an investment for children, as they accumulate gains over the years.
What types of ETFs are there?
Investors can also use ETFs to invest in different asset classes on the stock market - depending on the index they track. The following ETF types, for example, are suitable for asset accumulation:
- Equity ETFs invest in a broadly diversified range of company shares. They are considered a basic investment for long-term savings plans as they offer growth and diversification.
- Commodity ETFs track the price performance of commodities such as gold or oil. They are more speculative and more suitable as a supplement.
- Money market ETFs focus on short-term bonds and offer stability but low returns - more for risk limitation than for asset accumulation.
- Bond ETFs invest in fixed-income securities and fluctuate less than equities, but also generate lower returns.
- Mixed ETFs combine different asset classes. They are more complex and less flexible than individual ETFs.
For long-term goals such as investing in children, equity ETFs are usually the main focus. Other types can be sensibly added to manage the risk in a targeted manner.
Why ETFs are a sensible investment for children
If you want to invest money for your child, there are numerous options open to you. However, many of them are associated with high costs, confusing structures or little flexibility. ETFs stand out from the crowd: They offer low-cost, transparent and broadly diversified access to the capital market - and are therefore particularly suitable for long-term wealth accumulation since childhood.
The following characteristics make ETFs particularly interesting in this context:
- Broad spread (diversification)
An ETF does not invest in individual shares, but tracks an entire market index - for example the MSCI World with companies from different countries and sectors or the DAX, the best listed companies in Germany. This means that the money invested is spread across many shoulders. Losses on individual shares have less of an impact on the total assets, which reduces the risk.
- Low running costs
ETFs are passively managed. This means that no fund manager attempts to achieve an excess return by specifically analyzing your data and selecting suitable securities. Instead, the ETF simply follows the composition of the underlying index. This automatic management results in significantly lower management costs than with traditional actively managed funds - and therefore noticeably reduces the burden on you as an investor.
- Easy access via savings plans
ETF savings plans make it possible to invest regularly with small monthly amounts such as 25 euros. This - and access to online brokers via technologies such as smartphone apps - lowers the barrier to entry and makes it easier to build up capital in a disciplined manner over the years. Once set up, the savings plan continues to run automatically - without any additional effort.
- High transparency
ETFs are subject to clear rules and legal requirements. You can see at any time which securities the ETF is investing in, how the performance is developing and what costs are incurred. This openness makes it easier for you to make informed decisions - without having to rely on a lack of transparency or product promises.
- Flexible design
An ETF savings plan can usually be adjusted, paused or terminated at any time. There are no fixed terms or notice periods. This flexibility is helpful if your financial situation or investment goals change over the years.
- Proven indices as a basis
Many ETFs are based on globally established indices such as the MSCI World, the S&P 500 or the FTSE All-World. These represent large parts of the global economy and are considered a solid basis for long-term investments. They enable you to make broadly diversified investments even without a deep understanding of the market.
An ETF cannot offer a guaranteed return - this applies to all investments in securities. However, if you take a long-term view, pay attention to broad diversification and keep an eye on costs, an ETF savings plan can be a robust strategy for building up capital for your child over many years.
❗The combination of simple implementation, low costs and broad diversification makes ETFs an investment instrument that is well suited to the requirements of long-term family provision.
Thanks to the increasing demand for this attractive model, private investors now have a large number of ETF providers and websites with informative content such as this guide. The problem is that not all advertisements and information are helpful. Do you need personal help with your choice? We will be happy to advise you free of charge on our services in the area of flexible ETF investments for children.
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How parents can set up an ETF custody account for children
If you want to invest regularly in ETFs for your child, you need a so-called securities account. This custody account works like an account for ETF shares and is held in the child's name - but is managed by the parent or guardian. Setting it up is straightforward, but requires a few formal steps.
This is how you do it:
1. compare custody account providers
Numerous banks and direct banks offer special children's custody accounts. Look out for clear cost structures, low custody account fees and a good range of ETF savings plans. Some providers allow you to open an account completely digitally, while others require you to prove your identity in person.
2. clarify requirements
To open a child custody account, both custodial parents need their identity documents and the child's birth certificate. If only one parent signs, a corresponding power of attorney or proof of custody is required. The custody account is legally assigned to the child, but may only be managed by the parent or legal guardian.
3. define reference account
The child custody account includes a so-called reference account - usually a call money or current account through which deposits and withdrawals are made. It should also be in the child's name to ensure a clear separation from parental assets.
4. set up a savings plan
Once the custody account has been opened, you can set up an ETF savings plan. You determine the amount you would like to invest regularly - for example 25, 50 or 100 euros per month. The ETFs are selected based on your investment goals and risk expectations. Many providers also offer a savings plan calculator for guidance.
In addition to this traditional way of investing in ETFs, there are also alternatives to a rigid savings plan. Our children's investments from Invest4Kids, for example, allow you to invest in ETFs in a flexible and tax-optimized way, while avoiding some of the risks.
Costs, risks and what else parents should know
ETFs are considered cost-effective and transparent - but as an investor, you should still be aware of the costs that can arise, the risks involved and the legal framework that plays a role when investing for children. It is particularly important to be aware of these aspects when investing for third parties - in this case, your child.
Here is an overview of the key points:
- Ongoing costs (TER)
Every ETF has ongoing operating costs, which are shown via the total expense ratio (TER). For many ETFs, this is between 0.1% and 0.5% per year. These costs are charged directly to the fund assets and reduce the annual performance - without you having to pay them separately.
- Custody account and transaction fees
Depending on the provider, additional custody fees or costs for the execution of the savings plan may apply. However, many direct banks offer free ETF savings plans. Pay attention to possible fees for changes to the savings plan, sales or special promotions.
- Risks due to price fluctuations
ETFs track a stock market index - and these markets fluctuate. Intermittent losses can occur with ETFs. It is crucial that you choose a sufficiently long investment horizon to ride out such fluctuations. ETFs are not suitable for short-term goals. Instead, they are suitable for retirement provision or investments for children.
- Performance without guarantee
ETFs do not offer a fixed interest rate. Their performance depends on the performance of the underlying index. In the past, broad equity indices have achieved positive long-term returns - but there is no guarantee of this.
- Security through special assets
ETF units are legally classified as special assets. This means that even if the fund company or ETF provider becomes insolvent, investors' assets remain protected. They may not be included in the insolvency estate.
- Taxation of income
Capital gains - such as dividends or profits from sales - are subject to withholding tax. However, children are also entitled to allowances. Depending on the amount of income, an exemption order or a non-assessment certificate may be useful. Tax advice can help to avoid unnecessary burdens.
- Transfer on coming of age
On their 18th birthday, your child will have unrestricted access to the custody account. They can then freely dispose of the assets - even if you originally intended them for other purposes. You should be aware of this legal situation when planning. Take a look at our study on the subject to see how worthwhile control mechanisms are in this area.
An ETF savings plan for children is not a risk-free undertaking, but neither is it an opaque financial product. If you know the basic cost factors, are able to classify possible fluctuations and pay attention to transparent structures, this form of investment offers you a comprehensible and long-term way to accumulate wealth. The decisive factor is not to evaluate short-term developments, but to have realistic expectations in terms of time, risk and objectives.
💡Good to know: You can do without the typical risks of rigid ETF savings plans. Our children's investments offer you more flexibility and security. With Invest4Kids, you combine the advantages of ETFs with a right of determination beyond the age of 18, tax advantages and contractually guaranteed conditions. This means that the investment not only remains transparent and return-oriented, but also completely under your control - tailored to what you really want to achieve for your child.
Conclusion: Invest clearly - make smart provisions
If you start early, you can achieve a lot with simple means. ETFs offer transparent and flexible access to investments - for your child too. It is crucial that you are aware of the possibilities, but also keep an eye on the limits of traditional ETF savings plans. There are alternatives for parents who want more control and security: Invest4Kids combines ETF-based investment with tax advantages, permanent right of determination and personal advice. The result is a strategy that not only works - but also suits your child in the long term.
We'll help you find the right investment for your child!
- An additional $25,703 per child, thanks to our modern ETF strategy
- Find the perfect ETF investment for your child in a 30-minute video conference from the comfort of your own home.
- Sit back and watch your child's assets grow – our experts will take care of the rest.
