What to look for in an ETF prospectus

When it comes to reading an ETF prospectus, you may have to dig into the first several pages to find the important information.  Therefore, I will list the key items I look for.

  1. MER(Management Expense Ratio) – How much the fund charges per year.
  2. TER(Trading Expense Ratio) – How much the fund charges the shareholder per year for trading fees.
  3. Trailing Commission – How much the fund charges the shareholder per year to pay the ETF advisor.  For ETFs, this seems to be 1%/year.

Morningstar.ca video – The case against ETF trailer fees

IShares lays out the information in an easy to read format.  When you click on the ETF, you will have to click on Literature to find the XIU summary document that will contain the information shown.

For other ETF companies, you will find that there maybe 6 or more documents for each ETF.  You will have to open them and see if it contains the information you want.

The summary document for all ETF providers should provide the above information.  If not, you will have to look at the other documents to see if it it buried in another document.

Websites used to show turnover rate per year.  I am unsure if this is being phased out since the websites I use no longer show turnover rate.  Turnover rate, the rate stocks get sold and bought, is important for long-term investors holding ETFs in a taxable account.  The capital gains tax from a high turnover rate ETF can offset any monetary gains in the ETF.

ETFs will rebalance to match that of the index being tracked.  The rebalancing will be done either on a monthly, quarterly, semi-annual or annual basis.  Therefore, it maybe important to see how often the ETF gets rebalanced since an ETF that rebalances yearly can move differently from the underlying index that rebalances quarerly.

For the ETF XIU.to, it rebalances every quarter, 3 months.  It can be found in the second column under Rebalance Freq.

Under Index Provider, you will see that the index being tracked is the Standard & Poors TSX 60 index and not the TSX index.  Therefore, you will have to visit the Standard & Poors website to see the history of the index over 10 years if the XIU.to does not have a 10 year history.  In the case of the S&P TSX 60 index, the average return is 1.48%/year over a 10 year period.

You will not get rich by owning the TSX 60 index, but you can be assured that this index has a history of being quite stable.  Unfortunately, the historical results does not predict future results, but I use the history to determine how volatile the ETF will be.

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