How to read a fund factsheet
Two pages that contain everything you need, if you know which five lines to read.
The five lines that matter
The index it tracks: this determines everything. "MSCI World" and "MSCI World SRI" sound alike but hold very different things.
The full annual fee, not just the management fee. And the fund's size — a very small fund risks being closed down and forcing you to sell.
The top holdings and their weights. If the first ten names make up half the fund, you have not bought what the company count suggests.
Tracking and replication
Tracking error shows how far the fund has strayed from its index. A cheap fund that tracks poorly can cost you more than a slightly pricier one that tracks precisely.
How it replicates matters too. Physical replication means the fund actually owns the shares. Synthetic replication means it holds a contract with a bank that promises it the index's return.
The synthetic kind is usually cheaper, but it adds a new risk: if the bank fails, the promise fails with it. That is a choice, not a mistake — but it should be made knowingly.
The performance numbers
Past performance is always shown and predicts very little. What is useful is not the average, but the worst year and the maximum drawdown.
Those two numbers tell you what you need to be able to endure. If the historical maximum drawdown is 45% and you know you would sell at 25%, this fund is not for you, however good its average return.
Also check which currency the performance is reported in. The same numbers in a different currency tell a completely different story.
What to look for, in order
| Line | The question it answers | Warning sign |
|---|---|---|
| Index tracked | What do I actually own? | Similar name, different contents |
| Total fee | What does it cost me? | Only the management fee is shown |
| Maximum drawdown | How bad has it been? | A very short history |
Key terms in this lesson
- Factsheet
- The two-page document summarising a fund's strategy, costs, and performance.
- Physical replication
- When the fund actually owns the securities in the index.
- Synthetic replication
- When the fund holds a contract with a bank that promises it the index's return.
- Counterparty risk
- The risk that the party who made you a promise is unable to keep it.
Quick check
Two funds track the same index. One charges 0.05% with a 0.40% tracking error; the other 0.15% and 0.03%. Which is likely to cost you less?
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