Did you know that most passive #ETFs that track an index don’t actually track the index accurately? The reason for that is tracking differences. The #TrackingDifference of an #ETF tells you by how much a fund has out- or underperformed its benchmark index. And most ETFs have a negative tracking difference which means that they underperform the index they are tracking. That’s just one out of the many things that you can find in the #FactSheet of an ETF.

When you select an ETF for your #Investment portfolio, there are some key characteristics of an ETF that you should be looking at, such as the clear objective of an ETF, the total expense ratio (also known as ongoing charges figure), the fund size, the number of companies an ETF invests in, the weight of the top 10 holdings, its long-term performance and how an ETF treats dividends.

The total expense ratio measures the ETF provider’s total cost of running a fund. Total costs may include fees like management fees, trading fees, legal fees and auditor fees. The total expense ratio is calculated by dividing the total annual cost by the fund's total assets averaged over that year.

A large fund size of an ETF is important because it shows you how liquid a fund is - so if there are a lot of people that trade that ETF. If an ETF has a small fund size, then it’s less liquid - so that not a lot of people are trading this ETF on a daily basis. If you want to sell a less liquid ETF, you could run into a situation where there won’t be a lot of investors that want to buy that ETF from you - which could bring down your selling price massively.

The number of companies or countries an ETF invests in indicates how diversified an ETF is.

Another key characteristic of an ETF is its #Replication method. There are two ways it can do that: physical or synthetic. #PhysicalReplication means that an ETF actually buys all the stocks that make up an index. If that index is the S&P 500, then the fund provider would go out and buy all the 500 stocks of the S&P 500 in a way that it replicates the index. That’s how most ETFs do it. #Synthetic ETFs, on the other side, don’t buy the stocks but instead use swaps to get the same return like the index they track. For that, a fund provider of a #SyntheticETF makes an agreement with a swap counterparty, usually an investment bank, who guarantees the payout of the total return of an index to the ETF fund. Synthetic ETFs are more popular in Europe and not so much in the US because of stricter regulations.


One last thing you should be aware of is how an ETF treats dividends. As you can imagine, there are companies in ETFs that pay dividends. What an ETF usually does with #Dividends is to either pay them out to ETF holders or use them to buy more of the companies it holds. That’s why you will find the label #Distributing on the ETF fact sheet for the ones that pay out dividends and #Accumulating for the ones that reinvest those dividends.

In this video, we will take a closer look at more useful information that you can get out of fact sheets and that will help you to make better investment decisions with ETFs. Enjoy!

⏰⏰ Timecodes ⏰⏰
0:00 Intro
0:54 Fact Sheet Explained - Key Facts
2:41 Fact Sheet Explained - Composition
4:11 Replication Method
6:11 Tracking Difference
7:51 Accumulating vs Distributing
9:32 Summary

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DISCLAIMER: This video is for educational purposes only and merely cites my own personal opinion. In order to make the best financial decision that suits your own needs, you must conduct your own thorough research and seek the advice of a licensed financial advisor if necessary.

#ETFFactSheet #FactSheetETF #IndexFunds

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