FINANCIAL FRESHMAN #034

TL;DR → Every fund available to you will have a Summary Prospectus associated with it. Your account servicer is mandated by law to provide this documentation, and it will help you understand the objectives of the investment, how the expenses are structured, how the fund has performed, and how the investment will change your tax situation.

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Your Investments

As a college student, making good investments is potentially not yet on your radar. Even still, you know that investments, especially for your retirement, are the key to making your money compound in the market. We still don’t (and never will) provide specific investment advice on this blog, but we have talked about a number of investment mediums, such as TDFs or Index Funds.

Think about it this way. You will graduate from college, and start working for a company that may offer you a 401(k) plan. You’ll make an account, and work with your employer to set up enrollment of some percentage of your income. When that money hits your 401(k) account, you will have to invest it in something.

There could be dozens of options to choose from within your 401(k) plan, so how the heck do you decide what to pick? That’s where the Fund Prospectus comes in. In this post, we will explain what a Fund Prospectus is, show you how to find them, and walk through the information you can get from them.

What is a Fund Prospectus?

Let’s start with Merriam-Webster.

Prospectus (noun)

A preliminary printed statement that describes an enterprise (such as a business or publication) and that is distributed to prospective buyers, investors, or participants

This…sort of helps. At a very high level, something educational that is “distributed to prospective buyers” is a relatively fair summary. There are two types of these documents—the statutory prospectus and the summary prospectus. For this blog post, we’ll focus on summary prospectuses, as they’re a little bit more digestible for the early-career investor.

In both cases, the Securities and Exchange Commission, or SEC, mandates that these documents be published for the purposes of investor protection.

A summary prospectus gives you a clear snapshot of an investment fund. It outlines the fund’s goal, the fees you’ll pay, past performance, and the team managing it, along with other key details to help you make an informed decision.

How do you Find Them?

Thanks again to the SEC, these documents should be found on the website of whichever company is servicing your investment account. We took the liberty of consolidating a number of locations down below.

• American Century: Explore Our Funds
  • Use the “Prospectus” column
• BlackRock: Advisor Center
  • Select the fund you are interested in, and click “Literature”
• Charles Schwab: Asset Management
  • Use “Find a Product” search, then review “Documents”
• Fidelity: Available Accounts
  • Select the fund you’re interested in, click “Prospectus” in the upper-right
• T. Rowe Price: Prospectuses Page
  • Click “View PDF” in the “Summary Prospectus” column
• Vanguard: Forms Page
  • Find the fund you’re interested in, click “View and Print”

If we’ve excluded your servicer here, it may be due to some servicers requiring a login before granting access to this information.

As you can see, your servicer may take you through a labyrinth of pages to get to the document you’re looking for. Rest assured, it will be there. Fortunately, once you find it, the content within them is fairly predictable! Let’s dissect one to make sure you know what to expect.

Vanguard S&P 500 ETF (VOO) Fund Prospectus

In this section, we’ll review the Summary Prospectus of VOO, Vanguard’s popular Exchange-Traded Fund that tracks the S&P 500.

Title Page: Nothing earth-shattering here, but make sure you notice the date. Servicers should publish a new prospectus each year, so make sure you’re looking at one with up to date information.

Objective: Typically early in the document, you should see an investment objective written out like this one.

Fees and Expenses: Prior to starting an investment, fees are likely one of the primary reasons you will review a prospectus. This section tells us if we’ll have to pay transaction fees, and itemizes the expense ratio of the fund itself. If you read our post on expense ratios, you know how critical this number is to the success of your investment. After this section, some prospectuses may give you an example of exactly how this expense ratio will impact a hypothetical investment.

Demonstrated Returns: This part is self-explanatory. Past performance won’t ever guarantee future returns, but it is beneficial to know how the fund has done recently.

Tax Information: For VOO this section is fairly brief, but this is where the tax implications of the investment will be outlined. For a municipal bond fund, for example, this is where you would learn that the interest gained is exempt from federal income taxes.

This certainly doesn’t cover everything, but it gives you a fairly good idea of what to expect within one of these documents. They are much more approachable than you may think!

Final Thoughts

Before committing significant funds to any investment, it’s essential to understand what you’re investing in. Summary prospectuses serve as great resources to educate yourself regarding the key details of any investment. Taking the time to review these resources ensures that you’re making informed decisions and investing with confidence. Remember, never invest in anything you don’t understand.