How to Read an Exchange Traded Fund Factsheet in Order

An exchange traded scheme's sheet prints two prices, not one. One is the value per unit struck from the scheme's own assets. The other is what units actually fetched on an exchange, set by whoever was dealing. Work through it in a fixed order: the date first, then the index named, then the tracking panel with a period and the word net or gross against every line, then the two prices kept apart.

What does this sheet add to the one already covered?

How a factsheet is laid out and which panel answers which question is set out under factsheet layout. An exchange traded schemeA scheme whose units, besides being created and redeemed at the scheme level, also change hands between people on an exchange. changes what sits on the sheet in two ways, and both are worth setting out before any step is run.

The first is that a second price appears. On an ordinary scheme one number says what a unit is worth, the value per unitThe scheme's net assets divided by the units outstanding, computed by the scheme from its own books., and every transaction refers back to it. On this wrapper there is also an exchange priceThe price at which units actually changed hands between two people on an exchange., the figure two people settled on between themselves. Two prices sit on one sheet, produced by two entirely separate processes, and almost every error a reader makes on this artefact comes from treating them as one quantity measured twice.

The second change is that most of these schemes are also index tracking schemesA scheme that aims to reproduce a stated index rather than to select holdings by judgement., and the sheet therefore carries a tracking panel whose bases must be named before anything is subtracted. The wrapper and the tracking are separate features that usually travel together, and separating them is what lets this guide do something honest with the record it has.

The record this walkthrough runs on is stated in full before a single step is run. Girnar Asset Management Limited, an invented manager, operates the Girnar Broad Market Index Fund. The fund tracks a broad index that is never named. The Girnar Broad Market Index Fund is an index tracking scheme rather than an exchange traded one, and this record holds no exchange traded scheme anywhere in it. There is no market price in it, no premium, no discount and no dealing spread. Two of the seven steps below therefore cannot be run, and those two steps come back as labelled blanks with the reason written inside rather than as a plausible price supplied so the method can be demonstrated on it.

Consider a used car with two numbers attached to it. One is what the workshop says the parts and the condition add up to. The other is what somebody actually handed over on a Sunday morning in a particular locality. Both are real numbers about the same car. Neither is a mistaken version of the other, and subtracting them measures not the workshop's accuracy but Sunday.

Step one: where does this sheet state its date, and what ages fastest on it?

The date sits wherever the manager chose to put it, usually near the masthead and occasionally in the footer, and finding it is not the hard part. Establishing what kind of date it is, is the hard part, and that procedure was settled earlier in this sequence, so this step uses it rather than repeating it. A sheet can be dated by the day it was published, by the day the figures inside it were struck, or by the last day of a period the figures cover, and those can be three separate days.

The consequence is what is specific to this wrapper, and it is sharper here than for any other document in this sequence. Every figure in every panel below inherits the sheet's date, and on this artefact two of the inheriting figures are prices. A price goes out of date faster than anything else a scheme publishes. A charge is quoted for a year and does not move between sheets. A return is quoted for a stated period and is what it is. A price is a statement about a single moment, and the moment has already passed by the time the sheet is typeset.

So step one produces one line of written output and nothing else: the date, and which of the three kinds it is. If the sheet does not make that clear, the line records that it does not, and a sheet that will not date itself has told the reader something. How often a sheet of this kind must be published, and what it must contain, are set by the Securities and Exchange Board of India (SEBI) and read at sebi.gov.in.

Step two: which index does the scheme say it follows, and where do its rules live?

Step two goes to the identity panel and reads the index the scheme states it follows. A qualifier on an index name is frequently the whole difference between two indices that otherwise read alike. So the name is written down exactly as the sheet gives it, including any qualifier attached to it. Naming an index means naming a real one. On the Girnar Broad Market Index Fund the sheet states a broad index and stops there.

Then write down the second half of the step, the half people skip. The sheet names the index and defines nothing whatsoever about it, and the rules that decide what the index holds and how its level is computed sit outside every publication the manager produces. The rules live in the index provider's own published methodology documentThe index provider's own publication setting out how an index is built, how a constituent enters or leaves it, and how its level is computed.. Not in the scheme information document, not in the statement of additional information, not in the key information memorandum and not here on the sheet.

The silence is not an oversight by the manager and it is not a hole in the disclosure. It is a division of labour. The manager states which measuring stick it has undertaken to follow; the body that makes the stick is the body that publishes how the stick is made. A school reports that a child was marked against the state board syllabus. The syllabus itself is a different document, published by the board, and no amount of reading the report card will produce it.

So the written output of step two is two lines: the index as stated, and the note that its construction rules are held elsewhere with a pointer to the class of document that holds them. The disclosure a scheme must make about the index it follows is set by SEBI and is read at sebi.gov.in. The industry level route to a scheme's published documents sits with the Association of Mutual Funds in India (AMFI) at amfiindia.com.

Step three: why does this artefact carry two prices rather than one?

Take the two apart by asking who made each number. Asking who made it works better than asking what it means. The value per unit is made by the scheme: it adds up what it holds, subtracts what it owes, and divides by the units in issue. Nobody negotiates it. The value per unit is arithmetic performed on a set of books, and it would come out the same whoever was doing the dividing.

The exchange price is made by people. Somebody wanted units, somebody else had units, and the two of them settled on a figure. The agreed figure carries whatever those two people believed, needed and were willing to accept at that moment. The value per unit is a computation and the exchange price is an agreement, and no amount of staring at them will turn one into the other.

The two prices are usually close. The reasons for the closeness belong to how units are created and redeemed at the scheme level, set out under creation and redemption. The step needs only two things: the two prices are close for a reason rather than by definition, and the space between them is produced by dealing rather than by the scheme's arithmetic. The space between the two prices has its own name, its own causes and its own uses, and none of them are the tracking panel's.

So the output of step three is a labelling exercise. Each price on the sheet is marked with which of the two processes produced it. A sheet that does not make that distinguishable is itself saying something, and what it says goes in the written output as a finding rather than being resolved by guessing.

On this record, step three cannot be run, and the reason takes one line. There is no exchange traded scheme in this record at all, so there is no exchange price to label and nothing to place beside the value per unit. A number in either position would be a made up one, so the comparison below is drawn with both marks left unnumbered.

Step four: how is the tracking panel read, and on which bases?

The tracking panel is where this artefact rewards a careful reader and punishes a quick one. The panel holds three quantities: what the index did, what the scheme did, and the difference between them. The temptation is to read straight to the third. Do not. The difference is a subtraction between two things that are not measured on the same footing. So the period and the word net or costless belong beside each of the first two before the third is looked at.

Here is why they are not. An index is a calculation. Nobody holds it, nobody staffs it and nobody is billed for it, so its return arrives on a costless basisA return that carries no charge at all, because the thing being measured is a calculation nobody pays to hold.. A scheme is a working operation with a charge running against its assets every day, and its published return is computed from values that have already had that charge taken out. A return computed that way is a net returnA return computed from values that already carry the scheme's charge, so no fee is deducted from it afterwards.. Subtracting the second from the first gives an answer that contains the charge, whether or not it was meant to be included.

Now the worked run on the Girnar Broad Market Index Fund. Every figure below is read fresh from the record and recomputed at the step that uses it rather than carried over. The whole chain is worked in hundredths of a percentage point as whole numbers, so nothing anywhere in it is rounded, and the two decimal places printed are exact rather than shortened.

Two things about that last row deserve saying out loud. The first is which way the sign runs: the scheme's figure is the smaller one, so the difference is negative, and writing it as a positive number is the commonest transcription slip on this panel. The second is that the bottom row is honest only because the basis column exists. Without it the row reads as one number minus another number; with it the row reads as a net figure less a costless one, and that is what the row actually says.

Now check the chain backwards. The habit is worth more than the answer. Start at the other end and see whether it closes.

The two routes agree, and they agree without sharing any arithmetic, which is the only kind of agreement worth having. The first route subtracted the index from the scheme in one move. The second went through the flawless tracker, produced the part the charge does not explain, and added the charge back. Both land on the same 0.28 points for the stated year.

Step five: what does the charge panel add to the tracking panel?

On most sheets the panels are independent. The charge panel can be read and one thing learned, the holdings summary read and another learned, without ever needing to hold both in mind at once. An exchange traded scheme's sheet has one exception, and step five exists to catch it. The charge panel and the tracking panel are arithmetically connected, and they are the only pair on the sheet that are.

Read the charge, then put it beside the difference the panel above reported. On this record the charge is 0.20 per cent of the scheme's own assets a year, and the tracking differenceThe scheme's return less the index's return, measured over a stated period. came to minus 0.28 points for the stated year. The charge is therefore the largest single component of the difference, and it is not the whole of it. The part left over is 0.08 points, and that part has a name: it is the residualThe part of a tracking difference that the scheme's charge does not account for..

The contents of the residual, and how a tracking difference splits, are settled under tracking difference and used here rather than rebuilt. The step's job is narrower and it is a labelling job again: name the charge component, name the residual, and refuse to let the first swallow the second. A reader who reports that this tracker fell behind by its costs has said something mostly true and structurally wrong. The report closes off the 0.08 points the charge does not explain.

Two warnings this record demands before any of these figures travel

The first is a near collision the record flags itself. The stated benchmark sitting behind the Girnar Large Cap Equity Fund returned 12.1 per cent costless in the stated year. The index that the Girnar Broad Market Index Fund follows returned 12.40 per cent costless in that same year. The two indices are different measuring sticks, one attached to a large capitalisation equity scheme and one to a broad market tracker, and nothing in this record ever equated them. Do not merge them, do not subtract either from the other, and never set this tracker's net figure for the year beside the equity scheme's benchmark figure just because the two land close together.

The second warning is about the comparison the arithmetic keeps inviting. The Girnar Large Cap Equity Fund returned 13.4 per cent net in the stated year. The Girnar Broad Market Index Fund returned 12.12 per cent net in that same year. Subtracting gives 1.28 points. The subtraction covers one year, one scheme on each side, and two schemes measured against two different sticks, and it settles nothing whatsoever. The gap is not evidence about one approach against another. There is no conclusion in it to draw.

Step six: what can this sheet establish about getting in and out on an exchange?

Every step so far has produced a line of written output. Step six produces three empty rows instead, and the reason is worth slowing down over. The empty rows are the most useful thing in this walkthrough.

The wrapper creates a limb of questions that the scheme's own arithmetic was never built to answer. What has the exchange price done against the value per unit over recent days? What does it cost somebody to buy a unit on an exchange and sell it again? How readily do units change hands there at all? All three questions are asked of the dealing, not of the scheme. The scheme can state what its assets came to and what its units divide out at. The scheme was not one of the two strangers who settled a price yesterday afternoon, so it cannot state what they settled on.

Against that stands the record in hand. Girnar Asset Management Limited operates the Girnar Broad Market Index Fund, and that scheme is an index tracking scheme rather than an exchange traded one. The record holds no exchange traded scheme anywhere in it, and therefore no exchange price, no premium, no discount and no dealing figure of any kind. All three questions in this limb are unanswerable from the document in hand, and the honest output of the step is three labelled blanks.

The alternative is worth weighing. Showing the method on a worked example would have required supplying a price. A supplied price sits on a screen looking exactly like a disclosed one, in the same typeface, to the same number of decimals, and a reader has no way of telling them apart afterwards. Supplying one is the difference between a bank statement and a number written on a napkin in the same handwriting: the paper stops carrying its own authority the moment one line on it was made up. So the step is handed back, and what follows is what handing it back looks like in writing.

Read those three rows as output rather than as absence. Each one names the question, states that this source could not answer it, gives the reason, and points at the address where the current requirement is read. A colleague picking the card up tomorrow knows precisely how much of it rests on the document. Two refusals out of seven steps is a stronger demonstration of the procedure than seven filled rows would have been. A procedure whose refusals are invisible cannot be checked by anybody.

Step seven: what is written down when a step cannot be run?

The last step is the one people skip, and skipping it throws away most of what the first six were for. The run itself is written down. Not the sheet, not a summary of the sheet, but seven rows carrying what each step established, in the order the steps were run.

Five of those rows come back with findings on this record. The date and its kind. The index the scheme says it follows, and the fact that the rules deciding what goes into it live somewhere the manager does not publish. The tracking panel, with 12.40 per cent costless for the stated year against 12.12 per cent net for the stated year and a difference of minus 0.28 points. The charge panel beside it, at 0.20 per cent of the scheme's own assets a year, accounting for 0.20 of those 0.28 points and leaving 0.08. And the closing row itself, recording how the run went.

Two rows come back as a refused stepA step recorded as unanswerable with its reason written in, rather than filled in from something other than the source in hand., and those two go into the written output exactly as they came back. The temptation lives here. A form with gaps in it looks like work half done, and the hand wants to fill them. A seven of seven run on a record that supports five is not a better result than a five and two, it is a fabricated one, and the two extra rows are indistinguishable on the card from the five that were read.

There is a household version of this. Somebody is totting up what a wedding cost from the bills in a shoebox, and for two of the twelve items no bill turns up. Writing a plausible number in for those two gives a total that adds up beautifully and is worth nothing. Nobody looking at it later can tell which ten came from paper. Leaving two lines blank with a note saying which envelope to go and find gives a total that is honest about its own edges. The second version is the one that can be acted on.

So the card below is drawn with its rows named, five of them filled from this record and two of them left empty with the reason written inside and SEBI at sebi.gov.in printed in the blank. The card's shape carries to a real sheet tomorrow. Because not one of the empty rows carries a figure, a period or a threshold, the card cannot go wrong on the day the requirement behind it moves. A card filled in from recollection has no such protection.

Where does this reading go wrong, and in which two directions?

Here is the mistake, and it is not a careless one. A reader opens an exchange traded scheme's sheet. Near the top sit the value per unit and the exchange price, printed within a centimetre of each other because they are both prices and a layout designer put like beside like. The reader subtracts one from the other, gets a small number, and writes down that the scheme's tracking is off by that much. Every step of that felt reasonable. All of it was wrong. The two figures were never two readings of one quantity.

Who runs this order for a living, and what do they do with the blanks?

Somebody at a small advisory firm has forty of these sheets to get through in a week and no appetite for reading any of them twice. The desk builds exactly the seven row card at the end of this walkthrough, one per scheme. The card is worth building because it is comparable across schemes in a way the sheets themselves are not. Sheet layouts differ between managers. A row asking for the period the tracking figure covers does not.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.