How to Read an ETF Fact Sheet Before You Buy

An expense ratio of 0.40% on a $20,000 position is $80 a year. You never see a bill for it. The fund takes it out of its assets a little at a time, so it shows up only as a slightly lower return, and the fact sheet is where that number and most of the others you need sit on one page.

Start with the index and the method

Fund names are written to sell. Find the name of the index the fund tracks, then find how that index picks and weights its stocks, which is usually described in a sentence or two near the top.

Market-cap weighting hands the biggest companies the biggest slices. The fund then moves with its giants. Equal weighting resets every stock to the same slice at each rebalance, which tilts the fund toward smaller names and means it sells some of its winners and buys more of its laggards every time the schedule comes around. Factor methods screen or weight by a trait such as value, momentum, dividends or low volatility, and two funds with similar names can define the same factor in different ways. If it is still unclear, read the index methodology document.

Some funds are actively managed and track no index at all. The fact sheet will say so. What you are buying then is the manager’s approach.

Check what it costs to own and to trade

The expense ratio is the annual cost of owning. The cost of trading is separate, and it comes from two numbers the fact sheet or fund website usually shows: average daily volume and the bid-ask spread.

A wide spread costs you twice, once on the way in and again on the way out, and on a thinly traded fund those two crossings can easily cost more than the difference between a cheap expense ratio and a slightly dearer one. Many fund websites publish a median spread. If yours doesn’t, watch the live quote for a few minutes. Check fund assets as well. Sponsors do close small funds that never gather enough money.

Use limit orders on anything with a wide or jumpy spread.

Look at concentration and sector weights

Next, the top ten holdings. Add up the weights.

Holding 300 stocks sounds diversified. With 45% in ten of them, the fund trades more like a ten-stock portfolio on most days, and if you already own some of those names directly or through another fund, you are more concentrated than the two tickers suggest, which is the problem ETF overlap walks through.

Then read the sector breakdown. A broad market fund can carry a much heavier weight in one sector than you’d guess from its name, and a sector fund used as a benchmark should match what you are measuring against, as comparing a stock with its sector explains.

Find the tracking difference

Tracking difference is the fund’s return minus its index’s return over the same period. The performance table usually lists both side by side.

A gap well beyond the fee points to other costs, such as trading or cash drag. A gap smaller than the fee can come from securities lending income. Check more than one period, since a single year can mislead in either direction. Tracking error is different. It measures how much the gap wobbles.

Read the yield and the NAV line

Yield figures on a fact sheet are defined differently from fund to fund. One distribution yield annualizes the latest payment. Another adds up twelve months of payments. The SEC 30-day yield uses a standardized formula based on the income the fund’s holdings earned, so it is the better figure for comparing two funds. Check the footnote to see which one you are looking at. Note how often it pays. Some distributions include return of capital.

The last line to read is the price against the net asset value. NAV is the value of the fund’s holdings per share. Price can sit above it or below it.

For large funds holding liquid US stocks, the gap is usually tiny. Bond and foreign funds can drift further. If you track your own results, measure against the fund’s market price, since that is what you paid, and calculating portfolio returns shows how to handle deposits along the way.

Common misreadings

The performance chart gets too much attention. It shows what the index did. A fund that tracks well will do whatever the index does next. The name gets too much trust as well, because words like “dividend”, “quality” and “growth” on the label mean only what the index rules say they mean, and those rules can differ sharply between two funds sold under almost the same description. Last, check the date. Holdings change.