ETF Glossary

Friday, June 19, 2009

Some common terms used by ETF investors:

TermDefinition
1 year forward growthAverage major brokerage firm financial analyst estimate of future year's growth in earnings.
12 month yieldChange in price of fund plus dividends received per share over past year divided by price of fund. A better measure of total return than simply rate of price rise.
12-b1 expensesPercentage of fund assets that fund manager may withdraw each year to pay for marketing and other non-operating expenses. Generally absent among ETFs but common and often large in actively traded funds.
3 year earnings growthAnnualized rate of increase of earnings of past three years.
AlphaA measure of performance in percentage above or below what would have been predicted by risk as suggested by its Beta (a measure of risk). Positive alpha means a fund performed greater than its risk would suggest, while negative Alpha means the fund under performed. An ETF of Alpha 1.5 outperformed its index by 1.5% as predicted by its Beta.
Annual turnoverPercentage of value of stocks in a portfolio that are sold and replaced with new stocks each year. Turnover in indexing should be low.
Ask priceLowest price any seller is willing to accept for a security at a given time.
Authorized ParticipantOften called a specialist, this sophisticated professional trading firm helps create (trade stocks for an ETF) and redeem (trade an ETF for stocks) ETFs.
Asset class breakdownPercentage of holdings in different types of investments, ie. large stocks, international, bond, etc.
Balanced fundsFunds that invest in both stocks and bonds in substantial amounts.
Benchmark indexAn index that correlates with a fund, used to measure a fund manager's performance.
BetaA measure of volatitility. Beta is a fund's volatility measured against the benchmark index, which has a set beta of 1. Therefore, if a fund has a Beta higher than 1, it is moving up and down more than the rest of the market. A fund with a Beta of 2 will move up 20 percent when the market rises 10 percent.
Bid priceHighest price that any buyer is willing to pay for a security at any given time.
Capital gainsProfits on the sale of stocks determined at time of sale.
Closet index fundAn active fund with higher fees that actually tracks an index fairly closely.
Deferred loadFuture sales charge that fund may charge as a fee at time of redemption (investor exit). Common in traditional mutual funds, rare in ETFs.
Dividend yieldA company's declared dividends per share as a percentage of its current share price.
Dollar cost averagingInvestment stragegy of making steady fixed investments (monthly for example) to a mutual fund. Helpful to maintain savings discipline and smooth out market swings from investor's perspective.
EnhancedA fund designed around an index but not tracking it verbatim. Often enhanced funds bet extra heavily on an index or bet against an index by selling it short.
Exchange-traded fund (ETF)An index fund which is traded on the stock market.
Expense ratioPercentage of fund assets that fund manager may withdraw each year to pay for operating expenses.
FloatThe number of company shares actually available for purchase by public on open markets.
Front loadPercentage of investor's assets that fund may charge as a fee at time of investment. Common in traditional mutual funds, rare in ETFs.
Grantor TrustETF that at creation follows an index but remains static and does not attempt to track it. HOLDRs are main adherents to this form of ETF.
GrowthDescribes stocks in a market which have relatively high Price-to-Earnings or other valuation ratio. Typically high growth, low-dividend companies. Can quickly outpace value stocks, but typically more risky.
Index fundAn index fund is a mutual fund that mirrors as closely as possible the performance of a stock market index. For example, many mutual fund companies have since established S&P 500 index funds to mirror that index by purchasing all 500 stocks in the same percentages as the index.
IndexingIndexing is a strategy to match the average performance of a market or group of stocks. A set formula is used to represent the index's value at any given time. ETFs track indexes.
Large CapShort for large capitalization, which describes companies whose market capitalization (total value) is among the largest in a market.
Management Investment Co.Common type of ETF that tracks indexes closely, allows sampling (not every stock in index is necessarily purchased) and derivatives in its operations. Similar to Unit Investment Trust. Examples include iShares, Sector SPDRs.
Market capitalizationTotal value of a company. Total number of shares multiplied by the price of a share.
Median market capitalizationMarket value (capitalization) of the middle stock in a portfolio of stocks if sorted by capitalization.
Minimum initial purchaseMinimum an investor may deposit initially. It may be lower in some cases for IRA retirement accounts.
P/B ratioAverage ratio of price to book value of stock in an ETF, weighted by their representation. Its inverse, B/P, is also commonly used.
P/E ratioAverage ratio of price to annualized earnings of stocks in an ETF, weighted by their representation.
Price spreadThe difference between the "bid" and "ask" price on a stock or ETF.
RebalancingIn a portfolio where asset classes must stick within certain ranges, (such as 35%-45% bonds), some must be sold and others bought.
R squaredA measurement of how closely a fund's performance correlates with an index. It can range between 0.00 and 1.00. An R squared of 1.00 indicates perfect correlation, while an R squared of 0.00 indicates no correlation. Used to assess tracking error or closet index funds.
REITReal Estate Investment Trust, a type of mutual fund that owns portfolios of commercial real estate. There are indexes for this asset class, and REIT ETFs follow these indexes.
ReturnsIndicate the total percentage gain of a fund over that time period.
Sector breakdownPercentage of a fund's equity holdings in various industries.
Securities & Exchange CommissionFederal agency that regulates U.S. financial markets, also known as SEC.
Sharpe ratioA risk-adjusted measurement of fund performance. Sharpe ratio is calculated by dividing the excess return of a fund over the risk-free rate (Treasury bonds) by its standard deviation. The higher the Sharpe ratio, the better a fund's risk-adjusted performance.
Standard deviationMeasure of fund volatility in percentages. Standard deviation measures the average variability of the fund's returns over a time period. Stable investments like money market funds have standard deviations near zero, while high-risk equity funds often have a much higher one. A standard deviation of 10 means approximately 68% of the time a fund will be within 10% of its mean (average) price.
Style driftWhen a fund moves away from its stated investment objective or the nature of its targetted asset class change over time.
SPYFirst and largest ETF, Standard & Poor's Depositary Receipts (SPDRs) track the S&P 500 and are pronounced just like the name for arachnid.
TickerAbbreviation used by brokerage firms to identify fund easily. Every ETF has one.
Total net assetsIndicates the total amount of assets, including cash, that a fund holds as of a certain date.
Tracking errorPercentage amount a fund's assets deviate from its benchmark index. This should be quite small.
Unit Investment TrustCommon type of ETF that requires exact duplication of index and prohibits derivatives in operation. Like Management Investment Trusts. Examples include SPDRs and QQQs.
ValueDescribes stocks in a market which have relatively low Price-to-Earnings or other valuation ratio. Typically slow growth, high dividend companies. Typically safer than growth stocks with high valuations.
YTDThe calendar Year-To-Date return from January 1 to the present..