How to Read a Fund Fact Sheet, and Why the Expense Ratio Comes First

Most people own funds, not individual stocks, through a 401(k), an IRA, or a brokerage account. Yet many people couldn't tell you what their fund costs. This is Part 10 of our Read the Numbers series, and it applies the same "read the document" habit to funds. The expense ratio comes first, because it's the one number you can count on paying every year.

Fact sheet versus prospectus

A fund fact sheet is a short summary the fund company publishes. The legal document is the prospectus, and the SEC's investor guide, How to Read a Mutual Fund Prospectus, points to two sections that matter most: the fee table and the performance section. A fact sheet typically repeats those same figures, so knowing what they mean lets you read either.

The fee table

According to the SEC guide, the fee table has three parts:

• Shareholder transaction expenses. Charges you pay directly, such as sales charges when you buy or sell shares.
• Annual fund operating expenses. This is the expense ratio: the percentage of net assets the fund uses each year to pay its fees and expenses.
• A hypothetical example. The estimated cost of owning the fund in dollars, based on a $10,000 investment over one, three, five, and ten years.

That's a $71 difference per $10,000 each year, and it keeps compounding. The SEC's investor bulletin, How Fees and Expenses Affect Your Investment Portfolio, makes the point directly: over time, even small ongoing fees have a big impact on your portfolio.

The performance section

The SEC guide describes three parts of the performance section: a bar chart showing the fund's historic performance and how consistent its returns have been, a table comparing the fund with a broad market index, and an indicator of its best and worst calendar quarters to show how volatile it has been.

• Compare with the right benchmark. A large-company stock fund should be compared with a large-company index, not a different market. If the comparison is flattering for an odd reason, ask why that index was chosen.
• For an index fund, the gap matters. An index fund's job is to match its index, so the gap between the fund's return and the index's return is roughly the cost of owning it.
• Look at several periods. One strong year says little. The consistency of returns, and how the fund behaved in bad quarters, tells you more.
• Remember what's not guaranteed. Past performance doesn't predict future results, and a fund that did well may simply have been in a favorable market for its style.

A five-line checklist

• Expense ratio: is it low for this type of fund?
• Sales charges: any "load" when you buy or sell?
• What it holds: top holdings and how concentrated they are.
• What it tracks or aims for: a broad index, a narrow sector, or an active strategy?
• Performance versus its benchmark: over several periods, and after fees.

None of this requires a finance background. It requires opening the document, which most people never do. If you understand the fee table and the performance table, you understand most of what a fund fact sheet is trying to tell you.

Common questions

What is an expense ratio?

The expense ratio is the percentage of a fund's net assets used each year to pay its fees and expenses. It's deducted from the fund's assets automatically, so you don't receive a bill, but it reduces your returns every year you own the fund.

Where do I find a fund's expense ratio?

In the fee table of the fund's prospectus, listed as annual fund operating expenses, and usually on the fund's fact sheet and on its page on your brokerage site.

What's the difference between a fact sheet and a prospectus?

A fact sheet is a short summary of key facts such as fees, holdings, and performance. The prospectus is the full legal document with complete detail, including the fee table and performance section the SEC recommends reading.