How to Read an ETF Fact Sheet: A Beginner's Guide
Learn how to read an ETF fact sheet and become a better investor.
It’s important for an investor to know how to read an ETF fact sheet. The information available on the fact sheet enables an investor to make informed decisions about choosing the right ETFs that are suitable for their financial goals and risk tolerance.
In this article, we'll explore what an ETF fact sheet is, why it's important and how to read one.
What Is an ETF Fact Sheet?
An ETF fact sheet is a document that provides detailed information about an ETF. It typically includes information about the ETF's investment objective, investment strategy, holdings, fees and performance. ETF providers often publish fact sheets for each of their ETFs on their websites.
Why Is Reading an ETF Fact Sheet Important?
Reading an ETF fact sheet is important because it enables an investor to determine whether an ETF aligns with their investment goals and risk tolerance. For example, a fact sheet can provide a variety of useful information about an ETF, including its investment objective, historical performance, top holdings, expenses and potential risks.
Reading an ETF fact sheet is important to:
- Determine if the ETF aligns with the investor’s goals: The ETF fact sheet provides information about an ETF’s objective and the strategy to achieve this objective.
- Understand the costs of investing in the ETF: For ETFs that passively track an index, low expenses are one of the primary contributors to long-term performance. When all else is equal, ETFs with the lowest expenses are often the best performers over time.
- Assess the potential risks of investing in the ETF: If an investor determines that an ETF is suitable for reaching their investment goals, they still need to evaluate if the associated risks are worth the potential returns.
How to Read an ETF Fact Sheet: Tips for Analyzing an ETF
Learning how to read an ETF fact sheet is a key part of learning how to choose the best ETFs. No matter the type of investor, there are some key data points, such as the ETF’s ticker symbol, expense ratio and investment objective, that are good to know before buying.
The top tips for reading an ETF fact sheet include:
- Identify the ETF’s ticker symbol
- Examine the ETF’s investment objective
- Analyze the ETF’s performance history
- Check the ETF’s expense ratio
- Evaluate the ETF’s holdings
- Analyze the ETF’s risk metrics
Identify the ETF's Ticker Symbol
The ticker symbol is a unique combination of letters that identifies the ETF. It’s essential to know the ETF's ticker symbol to access information on the fund. If an investor chooses to add the ETF to their portfolio, they’ll need the ticker for placing an order to buy shares through a broker.
Examine the ETF's Investment Objective
Each ETF has a specific investment objective, such as tracking a particular index or investing in a particular sector to achieve a specified goal or purpose. It’s essential for investors to understand the investment objective to determine whether the ETF aligns with investment goals.
For example, if an income investor is looking for ETFs that pay dividends, they’ll likely want to look for the yield information on that fund’s fact sheet. However, an investor who wants to build their assets for a long-term goal may be more interested in a growth ETF.
Analyze the ETF's Performance History
The ETF fact sheet provides information on the fund's historical performance, including returns and volatility. The returns are typically presented as the average annual returns over the past one, three, five and 10 years. Investors can compare these returns to those of a benchmark index or to other ETFs under consideration.
Check the ETF's Expense Ratio
The fees and expenses section of a fact sheet may include the expense ratio, which is the percentage of the ETF's assets that go toward covering the costs of running the ETF. It may also include any transaction fees or other expenses. For example, if an ETF’s expense ratio is 0.20%, the annual cost of owning the fund is $20 for every $10,000 invested.
Evaluate the ETF's Holdings
The ETF fact sheet will typically provide a list with ticker symbols of the fund’s top 10 holdings. The fact sheet may also provide the fund's diversification and exposure to specific sectors and regions. Investors can also review the holdings and sector exposure to determine if the ETF has any overlap with their existing portfolio.
Analyze the ETF’s Risk Metrics
The ETF fact sheet provides information on the risks associated with the fund, including market, credit and liquidity risks, as well as any risks associated with the types of securities the ETF holds. By understanding the risks, investors can make informed decisions on whether the fund is suitable for their risk tolerance.
Some fact sheets include valuation metrics, such as P/E ratio or P/B ratio, which can help to determine whether an ETF is overvalued. Other data points that can be associated with an ETF’s risk profile include assets under management and average volume.
For example, large ETFs, or those with higher AUM, tend to have higher trading volumes, which can lead to superior pricing through lower bid/offer spreads. In other words, high AUM indicates the ETF is widely traded and there will not likely be other associated risks, such as low liquidity, which can lead to wider bid/offer spreads.
Bottom Line
By learning how to read an ETF fact sheet, an investor can evaluate an ETF and determine if it aligns with their investment goals. The key data points of the fact sheet, such as an ETF’s objective, historical performance, expense ratio and assets under management, are some of the most important pieces of information needed to make good investment decisions.
