How to evaluate ETFs based on financial reports

Like mutual funds, ETFs are regulated by provincial and territorial securities commissions, which regulate their sale and distribution. This includes requirements for disclosing investment information and pricing. ETF sponsors must provide and update several different reports, such as ETF Facts sheets and prospectuses. Seasoned investors can and should use the information in these regulatory documents to evaluate individual ETFs.

This article gives a brief overview of these financial reports and documents—all free and readily available to the Canadian public—and explains how investors can use the information to make decisions on which ETFs to buy or sell.

What are the different types of disclosures/reports?

ETF sponsors are required to disclose and update several different reports.

1. ETF Facts: Similar to a mutual fund’s Fund Facts sheet, the ETF Facts sheet is a four-page summary of the product that highlights key information such as the inception date, total value, the management expense ratio (MER), the fund manager, the timing of distributions, the ticker symbol, market exchange, the investment objective, asset allocation, top 10 holdings, fund performance and risk rating.
2. Prospectus: ETFs are required to provide a long-form prospectus that offers a more in-depth look at the fund. This includes basic disclosures, fees and expenses, performance, legal structure, investment objectives and strategies, risk factors, distribution policy and income tax considerations.
3. Quarterly interim and annual reports: These financial reports provide detailed financial information on the ETFs and on the securities making up the portfolios.
   • The quarterly portfolio disclosure shows a summary of the asset mix, top holdings and total net asset value.
   • The interim financial statement shows the detailed financial position, performance and notes about the ETF over a period of less than one year. Unlike the annual financial report, the interim report does not need to be audited.
   • The annual financial statements show the full, audited statement of financial position, income statement, changes in net assets, cash flows and notes about the fund.
4. Proxy voting policies and records: ETFs have proxy voting policies for the securities held in their portfolios. According to National Bank Investments, these policies set out guidelines for voting on shareholder resolutions (election of directors, appointment of auditors, executive and director compensation, changes concerning the rights of shareholders, etc.).

How often do ETF providers issue reports for investors?

ETF reports are updated regularly:

• ETF Facts sheets must be updated at least once annually and any time there is a material change to the fund.
• The ETF prospectus must be updated annually.
• Annual and quarterly statements are filed, you guessed it, annually and quarterly. Interim statements cover a period of less than one year—usually six months.
• Proxy voting records covering the 12-month period ending June 30 must be posted online by August 31 each year.

Where can investors find these reports?

Investors can locate these financial reports directly on the ETF sponsor’s website. For example, National Bank Investments lists all regulatory documents, and you can access a specific ETF Facts sheet, prospectus, financial report or proxy voting record.

Note that an individual ETF’s prospectus and financial statements are often bundled together with those of other ETFs offered by the fund sponsor.

What numbers should investors pay attention to?

Bobby Argitis, business development manager with National Bank Direct Brokerage, says the ETF Facts sheet is the most useful of the brochures because it highlights key information that most investors are looking for, such as the management expense ratio, investment objective, top holdings and performance. “Most DIY investors can find everything they need in the ETF Fund Facts sheet summary,” he says.

Argitis adds that other useful information, such as the liquidity of an ETF, can be gleaned by looking at the total assets of the fund, the average daily trading volume and the average bid-ask spread. Smaller ETFs are not traded as frequently as larger ETFs and can have a wider spread between the bid and ask prices—adding to the total cost for buying and selling the ETF.

Other notes to uncover

Looking through an ETF’s financial reports and disclosures is a good way for keen investors to dig deeper and expand their knowledge. It might even prevent a case of mistaken ETF identity. For instance, an investor eager to invest in a U.S. equity ETF might miss the word “active” in the NBI Active U.S. Equity ETF (NUSA/TSX). A quick scan of the ETF Facts sheet shows a helpful warning not to buy this ETF if you are looking for passive exposure to the S&P 500 index.

The proxy voting records can also be an interesting source of information. The same NBI Active U.S. Equity ETF holds shares of Microsoft Corporation (MSFT/NASDAQ). NBI voted for a shareholder proposal to provide a report on the gender and racial pay gap, as well as on the effectiveness of workplace sexual harassment policies, even though Microsoft management recommended a vote against these proposals. (Visit NBI for full details about its ETFs.)

Final thoughts

Financial reporting and disclosures offer investors a wealth of information that go beyond the basics of fees and performance. They allow investors to look under the hood at the fund’s financials and uncover useful facts about the fund’s structure, holdings, tax implications, pricing, trading volume and even proxy voting records.

While the ETF Facts sheet provides investors with most of the information they need to evaluate an ETF purchase, some of the more exotic ETFs may require a deeper dive to understand their inner workings and how they impact you as an investor.

Your investing platform can be a great resource. National Bank Direct Brokerage has a dedicated ETF Centre that helps users search for funds based on industry, management style, annual fees and more. Investors can also improve their skills with a wide range of articles, videos, tutorials and seminars. National Bank Direct Brokerage also has a free mobile app for iOS and Android. On your smartphone or tablet, you can trade stocks and ETFs online at $0 commission, create watchlists, set up alerts for specific stocks, transfer funds and more.

MoneySense ranked National Bank Direct Brokerage as the best online broker for ETF investing in 2021 and 2022. Use the promo code MoneySense when you open an account* and you’ll pay no commissions on transactions.

Read more about ETFs:

• How to choose ETFs for your investment portfolio
• Which type of ETF investor are you?
• What seasoned investors look for in an ETF prospectus
• How to use ETFs in your child’s RESP
• Pros and cons of a one-ETF portfolio

About Robb Engen, QAFP

Robb Engen is a fee-only advisor who will work with you to achieve your financial goals by creating a financial plan with actionable steps along the way.