There are a lot of terms the ETF industry uses every day, some of them unique to the ETF structure. Here’s a list of some of the most commonly used terms in ETF land, ordered alphabetically from letters E to M.
- A - B
- C - D
- N - U
Environmental/Social/Governance: 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 business’ sustainability, environmental footprint, social impact, management and diversity efforts as well as ethical issues. ESG ETFs incorporate ESG metrics in their security selection and weighting in an effort to offer more targeted access for investors looking to be socially responsible, or environment friendly with—or to impact-invest—their money.
Exchange-Traded Fund: 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 bonds, commodities, currencies, as well as derivatives, or a mix of any of these different assets. An equity ETF, for example, is a portfolio of several stocks from different companies; a Treasury ETF is a portfolio of several bonds, and so on. ETFs are structured much like a mutual fund except that they list and trade on a stock exchange under a single ticker, like a single stock.
Exchange-Traded Note: 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 issuing bank.
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 commonly used metric to assess the cost of an ETF.
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 exposure to spot returns of that commodity. The biggest example of a grantor trust is the SPDR Gold Trust (GLD). By owning shares of GLD, ETF investors actually have claim to physical gold being vaulted in London.
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 owning every security included in that index, or by using a representative sample of securities. Most of the 2,200-plus ETFs on the market today are index-based, or passive ETFs.
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, the amount of leverage is reset daily, making these vehicles ideal for daily or very-short-term holding periods due to the compounding nature of their returns. They are not long-term, buy-and-hold instruments, but tactical tools for short time horizons. Inverse ETFs work similarly, but they offer the inverse performance of an index.
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 maker, many of which are incentivized by exchanges to keep markets humming along.