One must understand what one is buying when making an investment. When investing in an ETF, must one always read the entire prospectus? If not, what are the boilerplate sections of ETF prospectuses that can be safely skipped? What are the must-read parts of an ETF prospectus?
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"One must understand what one is buying when making an investment." if you mean "make a trade", then surprisingly - that is untrue! For example, the only thing HFT'ers know about a stock is the alphanumeric symbol, and they probably do more trading by count than anyone. Almost all "active trading" (day trading or position trading) and I'd say basically all casual trading is based on momentum or trivial news stories. For better or worse :O (I appreciate your interesting question is "what are the key parts of an ETF prospectus".)– FattieCommented Oct 13, 2020 at 11:58
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1@Fattie I mean "making an investment", as written. Of course, if you are a news trader, sentiment trader, arbitrageur, front runner (e.g. HFT) or rumormonger (e.g. pump and dump), you have less of a need to know the "real values".– FluxCommented Oct 13, 2020 at 12:07
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By all means. Note I said " if you mean "make a trade" ..." the duality and tension between the subtle shades of meaning of "trade" and "invest" is always worth re-examining on this site! Setting aside HFT, I'd say almost all "investment" by "civilians" (like, when your "Mom buys some stock") is what you characterize as "news" or "sentiment" trading: that's "the norm". Where you say "one must understand..." you should say "the rare sensible person like myself must understand ..." :) :)– FattieCommented Oct 13, 2020 at 12:37
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No authority makes you read the prospectus (at most, you must confirm you have had the opportunity to receive it) so there are zero "must-read parts". If you're looking for a trade-off between personal effort and the risk of some fund component, fee, or legal detail that will surprise you when you do discover it, that's a personal risk management problem.– user662852Commented Oct 13, 2020 at 13:31
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What do you expect to find in an ETF's prospectus that will make you a better trader or investor?– Bob BaerkerCommented Oct 13, 2020 at 15:27
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1 Answer
I would not say it's "important". I would suspect that very, very few people read prospectuses before buying ETFs.
Just like you don't look at the complete list of ingredients or the recipe of a sandwich before you buy it at a restaurant - you just want the high points. What kind of bread does it have and what's in between. Maybe you look at reviews to see if other people enjoyed it (probably not, but it help with the analogy :-) ). You don't need to know how much of each ingredient went into the bread, what parts of the animal the meat come from, etc.
For an ETF - the main points are what sector/style/size it's invested in (or it's high-level investment objective if it's more specific), how has it performed in the past, etc. You don't need to know the exact makeup of investments, its rebalancing methods, its managers, and all of the legal mechanism necessary if things go wrong. It's fine to know those things, but it doesn't give you any kind of advantage. You're going to earn the same returns as every other investor that didn't read the prospectus. It doesn't tell you if the fund is a good investment, what your price target should be, etc.
The prospectus is more important for initial investors to know what they're getting into. After some time has passed, the "proof is in the pudding", and past performance is more important for investors, and the high level objectives can be easily found by looking at the description of the fund.
answered Oct 13, 2020 at 13:36
