From NAV To UITs

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 the letter N to letter U.




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 portfolio. In other words, the NAV tells you how much a share of an ETF is actually worth.

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 disclosing portfolio holdings only periodically. These proposed ETFs work either by introducing a “trusted agent” in the process who would create/redeem shares through confidential accounts for the APs, or by using proxy portfolios that don’t represent the entire basket in an effort to keep holdings secret. It has long been said that transparency has kept many active fund managers away from the ETF market, so the argument goes that a nontransparent wrapper could revolutionize the space.



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.



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 for the ETF. If an ETF holds a hot in-demand security, lending it out can generate significant revenue for ETF shareholders. The biggest risk associated with this practice is counterparty risk.

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 for some alternative scheme, be it equal-weighting portfolio holdings, or some form of factor-based weighting, or dividend- and revenue-weighting methodologies, to name a few. About half of all U.S.-listed ETFs are some flavor of smart beta.



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 index-based ETF would deliver exactly the performance of the index minus its fees (the expense ratio). But other factors can contribute to tracking difference, such as trading and rebalancing costs, as well as tracking methodologies that differ from the original benchmark, among other things. Tracking difference is not to be confused with tracking error, which is a measure of how volatile the performance difference between an ETF and its index is—the standard deviation—on an annualized basis.



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 offering. UITs also come to market with a set number of shares and an expiration date. The SPDR S&P 500 ETF Trust (SPY) is the biggest example of a UIT, and one that has had its expiration date postponed over time.

(This is not an exhaustive list, of course. We’ll keep adding terms online, so check back often at Education Center or contact Cinthia Murphy at [email protected].)

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