What is an ETF and how to read its factsheet

What an ETF is

ETF stands for exchange traded fund: a fund that follows an index (for example world shares or government bonds) and is bought and sold on the exchange like a share, throughout the trading day. It doesn't try to beat the index: it tries to replicate it at low cost. That is why the factsheet matters almost more than the "instrument": two ETFs on the same index can differ in costs and structure.

The eight items to read

1. Tracked index. What is inside: how many securities, which countries, which sectors. A "world" ETF and a "developed markets" ETF are not the same.
2. TER (annual cost). The yearly percentage the fund keeps. Over long periods it weighs a lot: see the guide on bank mutual fund fees and the investment fees tool.
3. Replication type. Physical: the fund buys the index securities (all or a sample). Synthetic: it uses derivative contracts (swaps) with a counterparty. Both exist; physical is simpler to understand.
4. Accumulating or distributing. In an accumulating ETF dividends are reinvested inside the fund; in a distributing one they are paid out to you. It changes handling and the timing of tax, not the underlying value.
5. Domicile. Where the fund is based (often Ireland or Luxembourg). It affects withholding tax on foreign dividends, not the Italian taxation of your gains.
6. Currency. The currency it is listed in and that of the underlying securities are different things: a euro-listed ETF on US shares still carries currency risk unless hedged.
7. Size and liquidity. Assets under management and the bid-ask spread (the gap between buy and sell prices), a cost you pay on every trade.
8. Tracking difference. How far the fund has actually deviated from the index over time. Better than TER alone.

The KID: the document to actually read

Every ETF has its KID, the key information document for savers: risk indicator, costs, scenarios, recommended holding period. Read it before buying: it is short and designed for comparison.

Three common mistakes

• Choosing on past performance. An ETF replicates an index: if a fund "did better", it is almost always because it follows a different index, not because it is better.
• Multiplying instruments. More ETFs does not mean more diversification if they follow overlapping indices.
• Trading too much. Every trade has spreads and fees; and selling at the worst moments is the highest cost of all. See why investors earn less than their funds.

This guide is educational and does not point to products: choosing an instrument depends on your plan, horizon and risk tolerance.

Sources

• Consob, financial education and information documents (KID)
• Borsa Italiana, ETF section
• ESMA, guidelines on ETFs and UCITS funds