ETF ACADEMY: Digging for Details or What is an SAI?

In addition to being transparent, low-cost and flexible, investing with ETFs is pretty straight forward.

You select the ETF that want to add to your portfolio and then enter a market or limit order with your broker – the same way that you buy a stock.

While most of the information that you will ever need on an ETF is available on the internet, you will occasionally need to dig a little deeper to get an answer.

If the fund’s overview page doesn’t have what you need, then download the fact sheet. If that doesn’t do the trick, then move on to the prospectus which is more of a legal description of the fund that has been dressed up by marketers.

If you still can’t figure it out, then we recommend that you call the fund manager. Our experience has been that the fund managers have very knowledgable people on staff who will track down an answer for you if they don’t already know it.

However, there will come a time when you will want to know something that is either very arcane or so detailed that it can’t be answered in a short phone call. For example, is your ETF a Unit Investment Trust or an Open-end Management Investment Company? Turns out that this can be an important detail.

This is where the Statement of Additional Information or SAI comes to the rescue.

The SAI is available for free at www.sec.gov. Select “Companies and other filers” and then type in the name of the ETF, e.g. “iShares” or “SPDRs”. Click on the name of the trust, e.g. iShares Trust, and look for form 497.

If that didn’t work, call the sponsor ask them to e-mail the most recent SAI to you.

Warning – before you open this document, be aware that the marketers were not in the room when the lawyers drafted it. That said, every possible detail that you want to know about your ETF is here.

These won’t apply in every case, but some examples include:

  • the exact details on how an index is constructed
  • what the managers can do with and without a shareholder vote
  • 3 pages on why you should think twice before investing in California municipal bonds
  • custodial names and ownership percentages of where the shares are held (e.g. as of October 2, 2007, 53% of the SPDR DJ Wilshire Large Cap ETF was held by Timber Hill LLC of Greenwich, CT)
  • all of the fees that a fund pays out and where they go
  • the names, compensation and ownership percentage (if any) of the trustees

You can even get the current year’s market holiday calendar for international markets – Japan beats everybody with 19 official holidays.

There are two especially important details in the SAI that should be of interest to your financial advisor and tax advisor.

First, the income, capital gains and dividend reinvestment policies are in the SAI. For example, you will find that the SPDR trusts are set up for dividend reinvestment, however, they leave it up to your broker to decide on whether to participate.

Second, any and all tax considerations are well laid out in the SAI. Even if the explanation is over your head, your tax advisor should get it.

For an example of a recent SAI, see the one for the SPDR Series Trust here.

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