ETF Glossary

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  • 12b-1 fees
    A fee some mutual funds charge to cover ‘advertising and promotional costs.’ ETFs do not generally charge 12b-1 fees (more on ETF costs and fees).
  • actively managed fund
    A fund whose portfolio holdings are chosen (and can be changed at any time) by a fund manager, and which are not usually fully known to the market. There are currently no actively managed ETFs (more on actively managed ETFs).
  • asset allocation
    A strategy of investing a portfolio across multiple assets classes in specific proportions so as to achieve diversification.
  • asset class
    A broad investment category, such as equities (stocks), fixed income (bonds), commodities, or real estate.
  • basket
    Another name for a portfolio of stocks or other assets.  See also: index-based fund.
  • benchmark
    Another name for an index.
  • brokerage commission
    The fee you pay your brokerage firm to buy or sell a stock or an ETF (more on ETF costs and fees).
  • capitalization (cap) weighted index
    An index or basket of stocks where the representation of each stock is weighted in proportion to its market capitalization (more on how indexes work).  See also: equal, dividend, and earnings weighted indexes.
  • closed-end fund
    While similar to ETFs in some respects, closed-end funds lack some of the main structural advantages of ETFs (more on closed-end funds).
  • commission
    The fee you pay your broker to buy or sell an ETF, generally a per trade amount (more on ETF costs and fees).
  • dividend
    A cash payment made by an ETF or mutual fund to its shareholders on a periodic basis – usually an aggregate of the dividends paid to the fund by the companies in its portfolio, less reinvestments (more on ETFs and dividends).  See also: yield.
  • dividend weighted index
    An index or basket of stocks where the representation of each stock is weighted in proportion to the dividends it pays (more on how indexes work).  See also: capitalization, equal, and earnings weighted indexes.
  • dollar cost averaging
    A strategy of making steady investments over time in a fund, to neutralize the effect of short-term market swings. Depending on the amounts involved, ETFs may not be as practical for dollar cost averaging as index mutual funds (more on ETF costs and fees).
  • earnings weighted index
    An index or basket of stocks where the representation of each stock is weighted in proportion to its earnings (more on how indexes work).  See also: capitalization, dividend and equal weighted indexes.
  • equal weighted index
    An index or basket of stocks where the representation of each stock is initially equal (dollar amounts), rather than weighted in proportion to capitalization or some other metric (more on how indexes work).  See also: capitalization, dividend and earnings weighted indexes.
  • ETF sponsor
    The organization that creates, markets and runs a specific ETF (more on how ETFs work).
  • exchange traded funds (ETFs)
    See what's an ETF.
  • exchange traded notes (ETNs)
    A new class of investments similar to ETFs, but structured as debt securities (more on ETNs).
  • expense ratio
    For mutual funds, the annual percentage of assets deducted for all fees including 12b-1 fees, management and administrative fees, and any other costs. Note that ETFs do not levy 12b-1 fees.  See also: management fee.
  • HOLDRS
    An early ETF variant (more on HOLDRs).
  • index-based fund
    An ETF or mutual fund whose portfolio composition is determined by an index rather than by a fund manager (more on how indexes work). Currently all ETFs are index-based.
  • indexing
    An investing strategy designed to get the benefit of market or category growth in a more diversified way than by buying individual stocks or assets.
  • large cap
    Companies with an approximate market value (capitalization) of $5 Billion or more.
  • leveraged funds
    Funds that use borrowing or other financial structures to magnify their performance relative to their target index.
  • liquidity
    The ability to convert an asset to cash quickly, without significant loss of value (more on ETF liquidity). Generally, the more heavily traded a security is, the more liquid it is.
  • loads
    Some mutual funds charge sales loads to investors when they buy in to the fund. Since ETFs are bought like a stock, on a public exchange, there are no sales loads involved (more on ETF costs and fees).
  • management fee
    The annual fee charged to investors in a fund (more on ETF costs and fees).
  • micro cap
    Companies with an approximate market value (capitalization) of under $300 Million.
  • mid cap
    Companies with an approximate market value (capitalization) of $1 to $5 Billion.
  • net asset value (NAV)
    The total value of an ETF's (or mutual fund’s) portfolio at any given time - the sum of the value of its holdings less any liabilities. Usually quoted on a per-share basis.
  • premium or discount to net asset value (NAV)
    The amount by which the price of a fund share differs from its NAV per share at any given time. ETFs generally have low or no premiums or discounts to NAV, because of their unique structure and redemption mechanism (more on ETF discounts and premiums).
  • prospectus
    A document issued by all mutual funds and ETFs as required by law, which discloses the fund's investment objectives, history, management, fees, holdings, and related information.
  • rebalancing
    The process fund managers go through on a periodic basis to re-align their fund’s portfolio with its underlying index.
  • redemption mechanism
    The structural mechanism which makes ETFs tax efficient and enables them to trade like stocks on public exchanges (more on how ETFs work).
  • small cap
    Companies with an approximate market value (capitalization) of under $1 Billion.
  • style
    An investing term for an approach or objective that defines a category: e.g. large-cap value, small-cap growth.
  • tracking error
    Any divergence between an ETF's value and the value of the index or benchmark it is attempting to track.
  • transparency
    The level of public disclosure of a fund’s holdings. While some mutual funds release only partial holdings data to the public at any given time, ETF holdings are always 100% known to the market.
  • turnover
    How often an ETF (or mutual fund) changes its portfolio holdings (more on ETF portfolio turnover). Turnover is measured as an annual percentage (e.g. a fund with 100% turnover would change the entire composition of its portfolio each year).
  • yield
    The dividend yield of a fund as a percentage of assets. Also sometimes called dividend rate.