A

Absolute Return: The total monetary or percentage gain on an investment. For instance, if £10,000 grows to £15,000, the absolute return is £5,000 or 50%.

Actively Managed ETF: An ETF with a portfolio manager making active allocation decisions instead of passively tracking an index. Despite potential outperformance, active ETFs can be costlier and face challenges in consistently beating benchmarks.

Accumulated Distribution: In ETFs, reinvesting income and dividend payments back into the fund, distinct from distributing payments to investors.

Acquisition: One company taking over another, either hostile (without consent) or friendly (with consent), typically for strategic growth, often involving cash, stock, or both.

Active Investment: Actively buying and selling assets to outperform benchmarks, contrasting with passive investment which aims to track benchmarks.

Active Investor: Typically, a hedge fund manager who actively trades based on market opportunities.

Active Manager: A fund manager making active investment decisions, aiming to surpass benchmarks through strategies and analysis.

Advisory: Offering investment advice for a fee, contrasting with execution-only services that don't provide advice.

AER: Annual Equivalent Rate, showing interest earned on a savings account factoring in compound interest and bonuses, simplifying comparisons between accounts.

AIM: Alternative Investment Market, a stock market for smaller companies, providing lower listing costs and lighter regulation compared to the main exchange.

Alpha: Returns beyond market movements, often associated with active management or smart beta strategies.

Arbitrage Opportunity: Exploiting price differences between an ETF's market price and its net asset value.

Asset Allocation: Diversifying investments across asset classes to balance risk and return according to investor objectives.

Assets Under Management: Total value of assets managed by an ETF, indicating its size and popularity.

Authorized Participant: Facilitates ETF creation and redemption, maintaining supply to meet demand and ensure ETF pricing aligns with its net asset value.

Average Daily Volume (ADV): Mean number of shares traded daily, indicating ETF liquidity and appeal for investors.

 

B

Backwardation: Occurs when the current asset price exceeds futures contract prices, driven by high demand compared to future expectations. For ETFs tracking futures, backwardation can boost returns during rollover but may increase transaction costs.

Balanced ETF: Invests in a mix of assets like stocks and bonds to offer both capital appreciation and income generation while managing risk. Allocation varies based on risk profile, with options for conservative or aggressive investors, popular for diversification and lower risk exposure.

Basis Point: Unit measuring slight changes in ETF or asset values, equal to one-hundredth of one percent (0.01%). Used for interest rates, bond yields, and expense ratios to articulate minor shifts, aiding precise comparisons between ETFs or assets.

Benchmark: Standard measure against which an ETF's performance is evaluated, typically representing a market sector or asset class. Used by investors to assess the fund's alignment with their objectives and gauge its effectiveness in mirroring market performance.

Beta: Correlation between a stock or ETF's performance and the broader market. Higher beta indicates greater sensitivity to market moves.

Bid/Ask Spread: Difference between the buying and selling prices of an ETF, affecting trading costs. Wider spreads imply higher trading expenses, an important consideration for investors assessing ETFs.

Blend Fund: Blends growth and value investing principles to offer exposure to various market segments. Aims for capital appreciation from growth stocks and stability from value-oriented investments, appealing to investors seeking diversification and flexibility.

 

C

Cash Balancing Amount: A reserve of cash or cash equivalents within an ETF's portfolio, ensuring liquidity and managing daily inflows and outflows. It helps fulfill redemption requests and aligns the fund's market value with its Net Asset Value (NAV), promoting stability and reliability for investors.

Closed-End Funds: Fixed-share baskets of securities trading intraday, often at premiums or discounts due to limited share supply. They typically distribute dividends and capital gains.

Commission: Fee paid to a broker for buying or selling ETF shares, even in commission-free trading environments. Understanding commission structures is crucial for assessing transaction costs accurately.

Commodity Pool: A specialized ETF focusing on commodities or commodity futures contracts, offering exposure without holding physical assets. These ETFs track commodity indices, enhancing accessibility to commodity investing.

Contango: Occurs when futures prices exceed spot prices, affecting ETFs investing in futures contracts and potentially reducing returns over time due to increased costs.

Counterparty Risk: Risk of the other party in a deal failing to meet obligations. ETFs with derivative contracts or exchange-traded notes (ETNs) may pose higher counterparty risks based on issuer reliability.

Corporate Bond: ETFs offering exposure to diversified or focused portfolios of corporate bonds, catering to fixed-income investors seeking income and potential capital appreciation.

Correction: Significant short-term market decline exceeding 10% from recent peaks, often viewed as buying opportunities. Understanding corrections aids investors in crafting informed investment strategies.

Creation/Redemption Mechanism: Unique process enabling ETF share creation and redemption, maintaining alignment with underlying holdings' value throughout the trading day.

Credit Quality: Evaluation of fixed-income securities' creditworthiness within an ETF's portfolio, crucial for assessing default risk and aligning bond investments with financial goals.

Custodian: Entity responsible for holding securities and cash in an ETF's portfolio, ensuring smooth day-to-day operations.

Custom Basket: Selected grouping of securities tailored for specific purposes, often used during creation/redemption to enhance tax efficiency and manage capital gains distributions.

 

D

Direct Indexing: Index investing without an intermediary wrapper, potentially disrupting the ETF space. It involves purchasing all stocks in an index, like the S&P 500, individually, allowing investors to custom-create their own index without a middleman.

Diversification: Strategic allocation of investments across multiple asset classes or sectors to lower risk exposure. ETFs facilitate diversification by holding a basket of securities, reducing the impact of poor performance in any single holding on the overall portfolio. Diversification offers stable, long-term growth potential by mitigating specific market fluctuations, essential for building robust and balanced portfolios.

 

E

Earnings Per Share (EPS): Key metric in ETFs representing a company's profit per share. Earnings-weighted ETFs prioritize companies with strong earnings, aiding evaluation of profitability and growth potential.

Environmental, Social and Corporate Governance (ESG): ETFs focused on sustainable investing, evaluating companies based on environmental, social, and governance practices. Investors use ESG ETFs to align portfolios with ethical and sustainable principles.

Equal Weighted Index: ETFs deviating from traditional indices by equally weighting constituents, promoting balanced representation and mitigating dominance of sectors or larger companies.

ETF Agent: Facilitates creation/redemption of ETF shares, ensuring market price aligns with Net Asset Value (NAV), enhancing liquidity and trading efficiency.

ETF Distributor: Promotes and markets ETFs to investors, raising awareness and facilitating share trading, enhancing fund visibility and accessibility.

ETF Issuer: Entity responsible for creating, registering, and overseeing ETFs, collaborating with stakeholders to launch and manage the fund.

ETF Sponsor: Leads creation and launch of ETFs, handles design, registration, and organization, shaping fund identity and effectiveness.

Exchange Traded Fund (ETF): Investment fund traded on an exchange, comprising baskets of securities tracking specific indexes, sectors, or asset classes, offering diversification, low fees, and intraday trading.

Exchange Traded Note (ETN): Debt security mirroring performance of an underlying asset, traded on exchanges, providing exposure without owning the underlying asset.

Expense Ratio: Annual fee charged by ETF issuer to cover operational costs, expressed as a percentage of the ETF's Net Asset Value (NAV), impacting long-term returns.

 

F

Fundamentally Weighted Index: ETFs tracking fundamentally weighted indexes allocate constituent securities based on fundamental characteristics rather than market capitalization. Stronger financial performance, such as higher earnings or book value, carries more weight, potentially offering a more reflective measure of intrinsic value. However, these indexes can be more volatile than market-cap-weighted ones due to sensitivity to individual companies' financial performance.

Future: Financial contracts obligating the buyer to purchase or the seller to sell an underlying asset at a predetermined price on a future date. ETFs investing in futures gain exposure to assets without direct ownership, offering efficiency in accessing commodities or currencies. However, these ETFs may be more volatile than those tracking traditional assets due to futures contract price sensitivity to changes in supply and demand.

 

G

Grantor Trust: A grantor trust is a legal structure for holding physical assets like gold or silver in ETFs tracking commodities. It offers secure storage and transparency, with investors owning fractional shares of the assets. Grantor trust ETFs are generally more tax-efficient than those tracking futures contracts, as income from physical assets is taxed at lower rates.

Growth Investing: Growth investing focuses on acquiring shares of companies expected to outperform the market. Growth ETFs target firms with significant growth potential, often younger and more volatile, offering higher returns but carrying higher risk.

High Yield Bond: High-yield bonds, or junk bonds, offer higher yields but are rated below investment grade. High-yield bond ETFs invest in diversified portfolios of these bonds, providing higher income streams but also higher risk due to potential defaults.

 

I

Implied Liquidity: Implied liquidity measures an ETF's potential trading volume based on the liquidity of its underlying assets. It offers insight into trading ease without affecting market prices, crucial for assessing ETFs tracking fewer liquid assets.

Income Equalization: Income equalization adjusts income distribution in certain ETFs to maintain consistent per-share income irrespective of outstanding shares. It ensures fair distribution regardless of entry or exit points, enhancing transparency and fairness.

Index Based: Index-based ETFs replicate specific market indices, offering diversified exposure and lower expense ratios. They provide real-time pricing and trade like stocks throughout the day.

Index ETFs: Index ETFs track specific market indices, providing exposure to various segments or asset classes. They offer a systematic means of accessing market segments with lower fees compared to actively managed funds.

Index Investing: Index investing through ETFs involves a passive strategy mirroring the performance of a chosen market index. It offers diversification, transparency, and lower fees compared to actively managed funds.

Index Providers: Index providers develop and maintain market indices used as benchmarks for investment products like ETFs, ensuring accuracy and transparency.

Initial Margins: Initial margin is the upfront payment required when buying an ETF on margin, impacting leverage.

Initial Public Offering (IPO): An IPO is when a private company offers shares to the public for the first time. ETFs can invest in IPOs to provide exposure to newly public companies.

Interest Rate Risk: Interest rate risk refers to potential investment value loss due to changes in interest rates, particularly affecting bond ETFs.

Inverse ETFs: Inverse ETFs aim to profit from declining markets by providing the opposite daily return of a specific index. They are suitable for short-term strategies.

Investment Advisers: Investment Advisers oversee ETFs' investment strategy, making critical decisions to shape performance and ensure strategic execution.

Investment Company: Investment Companies oversee ETF operations, including creation, administration, and compliance, collaborating on regulatory compliance and strategic decision-making.

 

L

Large-Cap ETF: Large-Cap ETFs focus on investing in large-capitalization stocks, offering exposure to established companies within a single investment vehicle.

Lead Market Makers: Lead Market Makers facilitate ETF trading by providing bid and ask prices, optimizing liquidity and ensuring fair prices for investors.

Leveraged: Leveraged ETFs aim to magnify returns through derivatives, suitable for short-term trading due to their complexity and daily reset mechanisms.

Liquidity: Liquidity in ETFs reflects the ease of buying or selling shares without affecting prices, crucial for efficient market participation.

 

M

Market Capitalization: Market Capitalization measures a company's size based on its outstanding shares, guiding ETF categorization and portfolio construction.

Market Data Vendors: Market Data Vendors provide real-time financial information to investors, empowering informed decision-making and market analysis.

Market Makers: Market Makers facilitate ETF trading by providing liquidity and maintaining fair prices for buyers and sellers.

Micro-Cap ETF: Micro-Cap ETFs focus on stocks of very small companies, offering growth potential but with higher volatility.

Minimum Margin: Minimum Margin is the lowest amount required for margin trading, ensuring investors have funds to cover potential losses.

Minimum Volatility: Minimum Volatility ETFs aim to construct portfolios with reduced price volatility compared to the broader market.

Mutual Fund: Mutual Funds pool funds from investors to invest in diversified portfolios, traded at the net asset value (NAV) price.

 

N

Net Asset Value (NAV): Net Asset Value represents the per-share market value of an ETF, calculated based on its assets and liabilities.

Non-transparent Active: Non-transparent Active ETFs shield portfolio compositions to protect fund managers' strategies while offering potential outperformance.

 

O

Open-End Funds: Open-End Funds continuously issue and redeem shares, ensuring real-time market value alignment with NAV.

 

P

Passive Management: Passive Management in ETFs mirrors specific index performance, offering a cost-effective and transparent investment strategy.

Physical ETF: Physical ETFs directly own securities mirroring the underlying index, enhancing transparency and mitigating tracking errors.

Premiums: Premiums occur when an ETF's market price exceeds its NAV, indicating robust investor interest.

Price-Weighted Index: Price-Weighted Indices assign weights based on individual stock prices, offering an alternative perspective on market representation.

Pricing Basket: An ETF Pricing Basket comprises securities used to calculate NAV, aiding transparent and efficient ETF trading.

Primary Market: The Primary Market is where ETF shares are created and redeemed, ensuring market price alignment with NAV.

 

Q

Quant Investing: Quantitative Investing uses mathematical models for investment decisions, offering a disciplined approach to portfolio management.

 

R

Robo-Advisors automate investment advice and portfolio management using algorithms, leveraging ETFs for diversified wealth accumulation.

 

S

Savings Bond: Savings Bonds are fixed-income investments issued by the U.S. Department of the Treasury, providing conservative, government-backed options for capital preservation and income generation.

Secondary Market: The Secondary Market is where investors trade ETF shares after the primary issuance, crucial for price discovery and liquidity enhancement.

Securities Lending: ETFs engage in Securities Lending to lend portfolio securities to institutional borrowers for collateral, enhancing returns while managing risks.

Self-Indexed ETF: A Self-indexed ETF tracks an index created and maintained by its issuer, offering flexibility and alignment with investment goals.

Short Selling: Short Selling in ETFs involves selling shares anticipating price declines, profiting from buying them back at lower prices, facilitated through borrowing shares.

Small-Cap ETF: Small-Cap ETFs invest in stocks of small-capitalization companies, offering exposure to potential growth and diversification benefits.

Spot Bitcoin: Spot Bitcoin trading enables immediate purchase or sale of Bitcoin for prompt settlement, facilitating exposure to Bitcoin's spot price movements through regulated shares on stock exchanges.

Stock Exchange: Stock Exchanges list ETFs, providing regulated platforms for trading shares and maintaining ETF liquidity and orderliness.

Synthetic ETF: Synthetic ETFs use derivatives to replicate index performance without owning underlying assets, introducing counterparty risk alongside cost-efficiency.

 

T

Tax Efficiency: ETFs' unique structure enables tax efficiency, minimizing capital gains distributions compared to mutual funds, enhancing after-tax returns for investors.

Tracking Error: Tracking Error measures ETF performance deviation from its benchmark index, guiding investors on replication accuracy and investment decision-making.

Trading Volume: Trading Volume reflects ETF market liquidity, influencing bid-ask spreads and trade execution efficiency, indicating a vibrant secondary market.

Transparency: ETFs offer daily portfolio transparency, fostering investor trust and informed decision-making, aligning with preferences for clarity in investment choices.

Treasury Bonds: Treasury Bonds offer safety and reliability, with Treasury Bond ETFs providing exposure to government-backed securities for income and capital preservation.

Treasury Inflation Protected Securities (TIPS): TIPS offer inflation protection by adjusting principal value based on CPI changes, with TIPS ETFs providing exposure for portfolio diversification and risk mitigation.

Turnover Rate: Turnover Rate reflects ETF portfolio asset turnover frequency, guiding investors on strategy impact, tax efficiency, and cost-effectiveness.

Unit Investment Trust (UIT): UITs issue fixed units holding predetermined securities until termination, offering transparent investment strategies with defined lifespans.

 

V

Value Investing: Value Investing ETFs target undervalued securities for long-term growth and income potential, providing diversified opportunities aligned with value investing principles.

Variable Annuity: Variable Annuities integrate ETFs within insurance products, offering income streams and market participation, balancing growth potential with annuitization security for diverse investor needs.

 

Y

Yield: Yield represents ETF income as a percentage of NAV, critical for income-seeking investors, with high-yield ETFs offering income potential from dividends or interest payments for portfolio construction and cash flow optimization.