Lesson 2: Essential Documents For ETF Investors

Know your product.

When evaluating an ETF, it’s crucial to review key documents such as the fact sheet, prospectus, and index methodology document.

The Fact Sheet provides a snapshot of the ETF, including its investment objective, top holdings, sector allocation, performance, and key statistics. It helps investors quickly understand the ETF’s strategy and past performance.

The Prospectus is a more detailed document that outlines the ETF’s strategy, objectives, risks, and costs. It explains how the ETF aims to achieve its goals and the rules it follows, such as what types of securities it can invest in. Understanding the prospectus is essential for grasping the ETF’s long-term strategy and potential risks.

The Index Methodology Document is vital for ETFs that track an index. It details the rules and criteria used to construct the index, such as how companies are selected and weighted. This document helps investors understand the underlying strategy of the ETF and how it might perform in different market conditions.

To evaluate an ETF's performance, compare it against similar peers in the same category. Review the fund provider's website for performance data and disclaimers about any strategy changes. Running simulations using tools like Portfolio Visualizer can help assess how the ETF has performed in the past, its risk profile, and its maximum drawdowns. This analysis can provide insights into the ETF’s potential future performance and how it might fit into your portfolio.