ETF Glossary

 

A-D

Actively Managed ETF

Most ETFs track an index, in what’s known as index-based or passive investing. An actively managed ETF is a fund that literally has a portfolio manager at the helm of the fund, making active allo... Read More

Alpha

Alpha is return that can’t be simply explained by market movement. In the ETF space, alpha is primarily the “extra juice” an active manager can extract beyond the market performance, as measured by an... Read More

Authorized Participant

He or she is the protagonist of the ETF creation/redemption process most investors will never know. Designated by an ETF issuer, the AP is someone with purchasing power who creates and redee... Read More

Beta

Beta is the correlation between a stock and the broader market, or the performance of an ETF relative to the segment of the market it accesses. The higher the beta, the more sensitive a stock or an ET... Read More

Bid/Ask Spread

ETFs trade like single stocks, so bid/ask spreads are a part of daily life for an ETF. The spread is simply the difference between the price someone is willing to pay for an ETF (the bid) and the pric... Read More

Closed-End Funds

These are baskets of securities that come to market with a fixed number of shares. They trade intraday, so they often trade at premiums or discounts to their net asset value due to their inelastic sup... Read More

Contango/Backwardation

These are terms seen across the commodity ETF space. They pertain to roll costs associated with moving from one futures contract to another. When an expiring futures contract is cheaper than—or tradin... Read More

Counterparty Risk

It’s the risk an investor faces that whoever is on the other side of the deal might fail. For example, ETF issuers offer a pattern of returns for a given fee in an ETF wrapper. They can be a source of... Read More

Creation/Redemption Mechanism

It's how ETF shares are created and redeemed, in a process that’s unique to the ETF structure. (We have a diagram detailing this mechanism here.) When there’s demand for new shares of an ETF, an autho... Read More

Custodian

In the ETF ecosystem, the custodian—often a large bank—is responsible for holding all the securities and cash for an ETF. That custody role is crucial to the day-to-day operations of a fund, even if i... Read More

Custom Basket

Like it sounds, a custom basket refers to a select grouping of securities, customized for a purpose. In ETFs, custom baskets come into play during the creation/redemption process for the purpose of im... Read More

Direct Indexing

Direct Indexing is index investing without any wrapper around it. Some say it’s going to be the next big thing, and potentially disrupt the ETF space. In practice, direct indexing means buying all the... Read More
Most ETFs track an index, in what’s known as index-based or passive investing. An actively managed ETF is a fund that literally has a portfolio manager at the helm of the fund, making active allo...
Read More
Alpha is return that can’t be simply explained by market movement. In the ETF space, alpha is primarily the “extra juice” an active manager can extract beyond the market performance, as measured by an...
Read More
He or she is the protagonist of the ETF creation/redemption process most investors will never know. Designated by an ETF issuer, the AP is someone with purchasing power who creates and redee...
Read More
Beta is the correlation between a stock and the broader market, or the performance of an ETF relative to the segment of the market it accesses. The higher the beta, the more sensitive a stock or an ET...
Read More
ETFs trade like single stocks, so bid/ask spreads are a part of daily life for an ETF. The spread is simply the difference between the price someone is willing to pay for an ETF (the bid) and the pric...
Read More
These are baskets of securities that come to market with a fixed number of shares. They trade intraday, so they often trade at premiums or discounts to their net asset value due to their inelastic sup...
Read More
These are terms seen across the commodity ETF space. They pertain to roll costs associated with moving from one futures contract to another. When an expiring futures contract is cheaper than—or tradin...
Read More
It’s the risk an investor faces that whoever is on the other side of the deal might fail. For example, ETF issuers offer a pattern of returns for a given fee in an ETF wrapper. They can be a source of...
Read More
It's how ETF shares are created and redeemed, in a process that’s unique to the ETF structure. (We have a diagram detailing this mechanism here.) When there’s demand for new shares of an ETF, an autho...
Read More
In the ETF ecosystem, the custodian—often a large bank—is responsible for holding all the securities and cash for an ETF. That custody role is crucial to the day-to-day operations of a fund, even if i...
Read More
Like it sounds, a custom basket refers to a select grouping of securities, customized for a purpose. In ETFs, custom baskets come into play during the creation/redemption process for the purpose of im...
Read More
Direct Indexing is index investing without any wrapper around it. Some say it’s going to be the next big thing, and potentially disrupt the ETF space. In practice, direct indexing means buying all the...
Read More

E-H

Environmental/Social/Governance (ESG)

ESG is a set of metrics outside traditional fundamentals that can explain or impact a company’s bottom line over time. When it comes to assessing the investment case of a company, ESG speaks to its bu... Read More

Exchange Traded Funds

An ETF is essentially an investment wrapper, merely a vehicle. It’s a basket of securities that offers diversified access to an area of the market. An ETF can invest in everything from stocks, to bond... Read More

Exchange Traded Notes

An ETN is a debt note issued by a bank. ETNs can access just about every corner of the market, and can often package complicated strategies, but they introduce counterparty risk associated with the is... Read More

Expense Ratio

The expense ratio is the operating expenses an ETF incurs over a given year divided by its assets. While the expense ratio is not the total cost of ownership an ETF investor faces, it’s the most commo... Read More

Grantor Trusts

One of the most commonly used structures for commodity ETFs, a grantor trust is a physically backed trust that stores the physical commodity—say, gold or silver bars—in vaults while giving investors e... Read More
ESG is a set of metrics outside traditional fundamentals that can explain or impact a company’s bottom line over time. When it comes to assessing the investment case of a company, ESG speaks to its bu...
Read More
An ETF is essentially an investment wrapper, merely a vehicle. It’s a basket of securities that offers diversified access to an area of the market. An ETF can invest in everything from stocks, to bond...
Read More
An ETN is a debt note issued by a bank. ETNs can access just about every corner of the market, and can often package complicated strategies, but they introduce counterparty risk associated with the is...
Read More
The expense ratio is the operating expenses an ETF incurs over a given year divided by its assets. While the expense ratio is not the total cost of ownership an ETF investor faces, it’s the most commo...
Read More
One of the most commonly used structures for commodity ETFs, a grantor trust is a physically backed trust that stores the physical commodity—say, gold or silver bars—in vaults while giving investors e...
Read More

I-L

Index-Based ETFs

These are exchange-traded funds that are designed to mimic the performance of an underlying index, delivering the same returns minus fees. Index-based ETFs simply replicate a benchmark either by ownin... Read More

Leveraged/Inverse ETFs

Leveraged ETFs offer enhanced returns of a given index over a short period of time. For example, a 2x S&P 500 ETF is designed to deliver twice the daily return of the S&P 500 Index. Most often... Read More
These are exchange-traded funds that are designed to mimic the performance of an underlying index, delivering the same returns minus fees. Index-based ETFs simply replicate a benchmark either by ownin...
Read More
Leveraged ETFs offer enhanced returns of a given index over a short period of time. For example, a 2x S&P 500 ETF is designed to deliver twice the daily return of the S&P 500 Index. Most often...
Read More

M-P

Market Maker

Also known as a liquidity provider, a market maker is someone who facilitates ETF trading, ensuring tight bid/ask spreads, depth and smooth trading throughout the day. Every ETF has a lead market make... Read More

Net Asset Value

The net asset value (NAV) is a measure of the fair value of an ETF share. It’s the sum of the value of all the securities in an ETF basket, divided by the number of shares of each security in the port... Read More

Nontransparent Active ETFs

ETFs are known for their transparency, with portfolio holdings that are disclosed in real time every day. Nontransparent active ETFs seek to keep the secret sauce of many portfolio managers secret by ... Read More

Open-End Funds

These are portfolios of securities that have an elastic supply of shares that trade on an exchange at net asset value. ETFs and most mutual funds are open-end funds. Read More
Also known as a liquidity provider, a market maker is someone who facilitates ETF trading, ensuring tight bid/ask spreads, depth and smooth trading throughout the day. Every ETF has a lead market make...
Read More
The net asset value (NAV) is a measure of the fair value of an ETF share. It’s the sum of the value of all the securities in an ETF basket, divided by the number of shares of each security in the port...
Read More
ETFs are known for their transparency, with portfolio holdings that are disclosed in real time every day. Nontransparent active ETFs seek to keep the secret sauce of many portfolio managers secret by ...
Read More
These are portfolios of securities that have an elastic supply of shares that trade on an exchange at net asset value. ETFs and most mutual funds are open-end funds.
Read More

Q-T

Securities Lending

This is the common practice of ETFs lending underlying securities to short-sellers. By lending out securities, the ETF picks up extra revenue that can ultimately lower overall costs and boost results ... Read More

Smart Beta ETFs

One of the most controversial commonly used terms in the ETF market is “smart beta,” but its adoption is widespread. Smart beta ETFs are funds that forgo traditional market-capitalization weighting fo... Read More

Tracking Difference/Tracking Error

Most ETFs are designed to track an index. Tracking difference, simply put, is the disparity between the returns of an ETF and the performance of the underlying index it tracks. In a perfect world, an ... Read More
This is the common practice of ETFs lending underlying securities to short-sellers. By lending out securities, the ETF picks up extra revenue that can ultimately lower overall costs and boost results ...
Read More
One of the most controversial commonly used terms in the ETF market is “smart beta,” but its adoption is widespread. Smart beta ETFs are funds that forgo traditional market-capitalization weighting fo...
Read More
Most ETFs are designed to track an index. Tracking difference, simply put, is the disparity between the returns of an ETF and the performance of the underlying index it tracks. In a perfect world, an ...
Read More

U-X

Unit Investment Trusts

One type of ETF structure, UITs blend traits of open-end and close-end mutual funds by offering a diversified basket of assets open to investors, but one that’s first issued through an initial public ... Read More
One type of ETF structure, UITs blend traits of open-end and close-end mutual funds by offering a diversified basket of assets open to investors, but one that’s first issued through an initial public ...
Read More

Y-Z