If you’ve been reading this blog and you read posts like What Investments to Actually Buy you’ve probably got an idea of why index funds are the way to go for the average Joe investor. They’re simple, plentiful, and, most importantly, cheap! But how do you know what you’re actually investing in? In this post I’ll show you how to read an index mutual fund fact sheet.
Let’s say you’ve decided to invest in the Schwab Total Stock Market Index Fund. If you google that, it’ll bring you to a page that looks like this.
The first thing you may notice is the bold jumble of letters: SWTSX. This is called the ticker symbol. It usually tries to represent the name of the company or fund it symbolizes. For example the Ticker symbol for Google is GOOGL. SWTSX stands for SchWab Total Stock indeX. It sort of makes sense.
The next line has the NAV or net asset value. The NAV is the price of one share. If you want to buy one share of this fund today it will cost you $77.68. But since this is a mutual fund you don’t need to buy whole shares. If you look down towards the bottom of the picture you’ll see the minimum investment requirements. In the case of this index fund the minimum investment is $1. This isn’t always the case for index funds. For example Vanguard’s total stock index fund (VTSAX) has a minimum initial investment of $3000.
Expense Ratio (Less is Better)
Next to NAV is the daily change. The index went down 0.05% yesterday, boo. With mutual funds, they are bought and sold only once per day at 4 p.m. Eastern Time, after the market closes. This is different than ETFs or exchange traded funds. ETFs can be bought and sold on the market floor many times throughout the day just like an individual stock.
Next you’ll see what’s arguably the most important number: the Net Expense Ratio. This is also called the Management Expense Ratio or MER. The expense ratio for SWTSX is just 0.03%. That means for every $10,000 you have invested Schwab will take $3.00. Remember the average actively managed fund has an expense ratio of 1-2%. That’s a fee of $100-$200 for every $10,000 invested. So 0.03% is not bad at all!
The next section is the year to date (YTD) return. So far as of 7/31/2021 SWTSX has returned 17.23%. This means if you invested $10,000 into SWTSX on January 1st, by now you have made $1,723 in gains. The overall market average for the last 100 years has been about 10% so 2021 has been a good year so far for investors.
Below these under Fund Strategy, you’ll see the goal of this index fund. “The investment seeks to track the total return of the entire U.S. stock market, as measured by the Dow Jones U.S. Total Stock Market Index.” The goal of SWTSX is to track the Dow Jones U.S. Total Stock Market Index. Seems straight forward enough. This is why it is so cheap. You’re not paying any fund manager to attempt to pick the winning stocks, they’re just following a publically available index.
Performance and Dividends (More is More)
Above fund strategy you’ll see a graph of the fund’s performance over the last 10 years. If you had invested $10,000 into SWTSX in August of 2011 it would have grown to over $40,000 by now. Schwab compares that to two other options the S&P 500 TR and the average Large Blend fund. We’ll discuss this more later.
In the details to the right you’ll see some of the same information as we’ve seen above. It also includes the distribution yield. The distribution yield includes the dividends and capital gains and is seen as a percentage of the NAV In this case it’s an average of the last 12 months of dividends and capital gains divided by the price of the stock. Under that you can see that the most recent distribution was $1.0805/share. I you divide $1.0805 by $77.68 you get 1.39%.
If you click over to the Dividends and Distributions tab under fund performance it’ll show you the distributions over the value of the stock shares. If you hover over the points you’ll see that this fund pays its dividends and capital gains at the end of December. This is pretty common. Most companies pay dividends quarterly, but most index funds usually just save this up and pay them out at the end of the year.
Risk vs. Reward (Equal is More)
If we scroll down the page you’ll get the names of the account managers and how long they’ve been managing the fund. This doesn’t matter for an index fund because the manager’s only job is to see that it follows the index. For an actively managed fund the manager’s job is to pick winning stocks so his history and experience with the fund is important. Why would you trust your money to someone who’s only been doing it for a couple years and never seen a stock market crash?
To the right of that you’ll see the Morningstar rating. This is considered a Large Blend fund. Large meaning mostly large capital, big companies, and Blend meaning a blend of stable companies like Johnson and Johnson and ones that have seen considerable growth like Amazon.
Then there’s the Portfolio weightings. This says that 26.92% of this index fund is in Information Technology like Apple, Microsoft, and Netflix. The next biggest weighting is in health care which makes sense because health care will always be needed. Financials is mostly banks which are usually pretty good at making money (you gotta have money to make money I guess).
Down at the bottom you’ll see the risk vs reward meters. The historic return and the historic risk are both above average. This makes sense since stocks are risky and risk and reward are usually well correlated. If you see a fund that has above average return and below average risk, you should be wary of it, and if you see a fund with high risk and low reward, you’re probably better off investing elsewhere.
Conclusion
We’ll finish this up next post discussing what’s actually in this index fund and how to see if it’s performing well against the stated goal.
What do you think? Does this help make it easier to understand fund sheets? Let us know in the comments below!
