Index funds & ETFs: read what is inside

Separate the wrapper from the method

A pooled fund owns a collection of assets. An exchange-traded fund trades on an exchange, while a conventional fund usually deals at its specified valuation point. Check the actual prospectus and dealing terms.

Index tracking describes a method: follow a defined basket and its rules. Not every ETF tracks an index, and an index fund does not have to use an ETF wrapper. Active management is another method, not a separate asset class.

Read the exposure before the label

Compare the holdings, country and sector concentration, weighting rules and rebalancing. A fund with hundreds of names can still be dominated by a few large companies. Several funds may overlap heavily.

• Distinguish the currency used to trade the fund from the currencies of its underlying assets.
• Check whether distributions are paid out or retained in the fund.
• Read the replication, counterparty and securities-lending disclosures where relevant.

Count costs and trading friction

An ongoing charge is only part of the cost. ETF dealing can also involve commission, bid–ask spreads and currency conversion. A low headline fee does not make every order cheap.

Compare how closely the fund has tracked its stated benchmark and understand the difference between a traded price and the value of its underlying assets. Historical tracking is not a promise.