Germany's Altersvorsorgedepot: ETFs, Funds and Investment Strategies Explained

When investing for retirement, asking "ETF or actively managed fund?" is not enough. The first questions are which markets to invest in, how much volatility is manageable and when the money will be needed. These decisions determine which funds can play a suitable role in a retirement portfolio.

Germany's Altersvorsorgedepot, a retirement investment account that providers can offer from 1 January 2027, provides a government-supported framework without a capital guarantee. The choice of investments is not unrestricted: German law defines which investments are permitted, while each contract determines which options are actually available. An ETF that meets the legal requirements may therefore not be offered by every provider.

Fund selection involves three separate considerations: The legal requirements, the provider's fund range and whether the investment strategy suits the individual saver.

This article answers five key questions:

• Which ETFs and funds are eligible for an Altersvorsorgedepot?
• Who chooses the investments, and how does the Standarddepot work?
• When might ETFs, actively managed funds or multi-asset funds be suitable?
• What matters when choosing a fund?
• How should your investment horizon influence your equity allocation?

An Altersvorsorgedepot may hold only investments included in the statutory list of eligible assets. This list is exhaustive. A label such as "ETF", "actively managed fund" or "multi-asset fund" is therefore not enough to establish whether a product is eligible. What matters is its legal classification and whether it meets the additional requirements.

A key category is UCITS, short for Undertakings for Collective Investment in Transferable Securities and known in German as OGAW. These funds must be permitted to be marketed in Germany and assigned a risk class no higher than five in the European Key Information Document (KID). The KID provides standardised information about the investment product.

This category can include both exchange-traded funds (ETFs) and actively managed funds. The rules therefore do not require an Altersvorsorgedepot to consist entirely of ETFs. Equally, not every ETF is automatically eligible. An exchange-traded fund must also meet the requirements for its product category and risk classification.

The permitted investments also include certain open-ended retail alternative investment funds (AIFs), as well as open-ended European Long-Term Investment Funds (ELTIFs). These must also have a risk class no higher than five in the KID. Certain euro-denominated debt securities issued by public-sector bodies are permitted too. Examples include securities issued by Germany's federal government, states and municipalities, other euro area member states and certain European institutions. A cash settlement account is allowed if it forms part of the Altersvorsorgedepot contract.

Direct investments in individual shares or cryptocurrencies are not included in the statutory list. This does not rule out stock market exposure through an eligible equity fund or ETF. Nor does legal eligibility mean that an investment cannot lose money: The Altersvorsorgedepot remains an investment without a guaranteed minimum capital amount at the end of the accumulation phase.

As a general rule, the provider selects the investments for an Altersvorsorgedepot. However, the contract can expressly allow savers to make their own selections. Those who use this option choose from the investments available under the contract. The fact that it is called an investment account does not automatically mean that savers can freely buy every fund permitted by law.

This distinction matters when choosing a contract. The broad range of investments allowed by law may be much wider than the fund range offered by a particular provider. Anyone seeking to implement a specific investment strategy therefore needs to consider both the products available and the decisions they are allowed to make. Who selects the investments is a separate question from which investments are legally permitted.

The Standarddepot is a version with more predefined features. The provider selects exactly two UCITS funds: One in risk class one or two, and one in risk class three, four or five. This allows a more cautious investment profile to be combined with one offering greater return potential. The requirements concern the funds' legal category and risk classes; they do not restrict the choice to passive ETFs.

Savers can decide how their contributions and government allowances are divided between these two funds. Without an individual choice, the default allocation specified in the contract applies. The arrangements also provide for a gradual shift towards a lower-risk allocation before payouts begin, although savers can choose to depart from these defaults. Standardisation reduces the number of decisions required, but it does not provide a capital guarantee.

The starting point is the desired mix of asset classes, such as equities and bonds. This is known as asset allocation. Together with the way it is implemented, it determines the portfolio's risk/return profile. Choosing between passive index tracking and active portfolio management is a further step, rather than the starting point for every investment decision.

Broadly diversified, passively managed ETFs can provide transparent and typically low-cost access to a particular market. Their approach is to track an index. The regions, sectors and securities represented in the portfolio depend on the index selected. The label "ETF" alone therefore does not tell investors how widely diversified an investment is or which risks it carries.

Actively managed funds may be relevant when investors are looking for a particular investment process, active security selection or targeted risk management. Allocations across different markets can also be actively managed. The key question is whether the expected added value justifies the additional costs. Active management alone does not ensure higher returns or a lower risk of loss.

Multi-asset funds combine different asset classes within a single fund. They can, for example, manage the ongoing allocation between equities and bonds. Investors thereby delegate these allocation decisions to the fund management team. The resulting opportunities and risks depend on the particular strategy and intended investment mix.

These terms therefore describe different characteristics: An index-tracking ETF is a way of implementing an investment strategy, active management describes a decision-making process, and multi-asset investing combines several asset classes. None of these labels replaces an assessment of legal eligibility or personal suitability. They do not establish that one approach is universally better than another.

Past performance alone is not a reliable guide to future results. The first consideration is what a fund actually holds and which role it should play in the retirement portfolio. Relevant factors include its asset classes, regions, sectors and currencies, the breadth of diversification and the associated risks.

For an index-tracking ETF, the underlying index, replication method and actual deviation from the index's performance are particularly important. For actively managed funds, relevant considerations include the investment process, portfolio positioning and consistent implementation of the strategy. Bond funds also require an assessment of credit quality and risks relating to maturity and interest rates. The most important selection criteria therefore vary by fund.

Costs should not be assessed in isolation either. Ultimately, investors need to consider the return achieved after costs in the context of the risk taken. Where investment performance is otherwise comparable, lower ongoing costs improve net returns. Focusing exclusively on the lowest possible costs can, however, narrow the investment universe. Certain investment themes or actively managed strategies may involve higher costs while also offering additional return potential. Higher costs are therefore not automatically a disadvantage, but they must be justified by corresponding added value.

With long investment horizons in particular, return potential, risks and costs need to be considered together. The aim should not be to minimise costs at any price, but to achieve the most attractive long-term investment outcome possible after costs. Whether a fund can contribute to that outcome depends on its strategy, risk profile and role in the overall portfolio.

An Altersvorsorgedepot adds another consideration: The contract itself. Alongside the charges for the underlying funds, the costs and rules of the retirement savings contract affect the investor's outcome. The available investments, switching options and any arrangements for reducing risk before retirement also matter.

The Standarddepot has a statutory cap of 1% on effective costs. Effective costs measure the average annual reduction in returns caused by charges up to the start of the payout phase. This cap does not apply to every Altersvorsorgedepot. Nor does it indicate the investment results a particular product will achieve. What matters to investors remains the actual net return after all costs, considered alongside the risks taken.

For the regular Altersvorsorgedepot, German law does not prescribe a single equity allocation that applies to every saver. A longer investment horizon may allow a higher allocation to equities, provided significant interim losses are manageable both financially and personally. The time remaining until retirement is therefore important, but it is not the only consideration.

Savers who will not need their money for several decades generally have more time available than those approaching the payout phase. This does not guarantee that losses will be recovered before the money is needed. As that point approaches, the risk of a sharp market fall becomes more significant because it can directly affect the funds available.

The Standarddepot has statutory default settings for this transition. Five years before the payout phase, the default limit on the share of accumulated capital invested in the more return-seeking fund is 50%. Two years before the payout phase and at its start, the corresponding limit is 30%. Savers can require the provider to agree to different percentages.

Importantly, these percentages are not direct limits on the account's equity allocation. They refer to the share of capital invested in the fund assigned to risk class three, four or five. The account's actual equity exposure also depends on how both funds invest. The allocation between funds must therefore not be confused with the overall allocation to equities.

An individual's investment strategy still needs to reflect their capacity to absorb losses, other secure sources of retirement income and planned withdrawals. Even during retirement, different parts of the portfolio may serve different time horizons: Money needed for near-term payments has a different role from assets that will not be needed for many years. An equity allocation based solely on age would not adequately account for these differences.

ETFs, actively managed funds and multi-asset funds can serve different purposes within an Altersvorsorgedepot. In each case, the product must meet the legal requirements and be available under the chosen contract. Only then does the question arise of whether it fits the desired risk/return profile.

The product label alone is therefore not enough. A coherent investment approach combines an appropriate asset allocation with manageable risks, reasonable costs and an investment horizon that matches when the money will be needed. The Standarddepot can simplify decisions, but it does not remove the need to weigh these factors.

Choosing investments is only one part of private retirement planning. Government support, existing contracts and how the accumulated savings will eventually be used are equally important.

• How does the Altersvorsorgedepot work?
• What government support is available for the Altersvorsorgedepot?
• What should existing Riester pension plan holders consider?
• What payout options are available?

This article is provided for information purposes only. The legal and tax information contained herein is not intended to constitute or replace legal advice, nor does it purport to cover all legal or tax considerations that may be relevant to the subject matter of this article. The information is not exhaustive and does not take into account the individual circumstances of any particular investor or group of investors. It cannot replace advice from a tax adviser based on the circumstances of the individual case. Although the information has been compiled with due care, no representation, warranty or guarantee is given as to its accuracy, completeness or currency.