ETF Glossary

The return from an investment after all income taxes have been accounted for and deducted. The SEC has adopted a number of amendments requiring mutual funds to disclose standardized after-tax returns. The amendments require a disclosure of standardized after-tax returns for 1-, 5-, and 10-year periods in the risk/return summary of the prospectus.

Refers to the categorization of an asset. Examples of key asset classes include stocks, bonds, commodities, currencies, real estate, and cash.

This term typically refers to large financial institutions, such as specialist firms and market makers, which are involved in the creation and redemption activity of exchange-traded funds.

A standard index used for measuring the performance of an investment.

Investors purchasing ETF shares in the secondary market through a brokerage account or with the assistance of a broker or registered representative may be subject to brokerage commissions and charges

The smallest block of ETF shares that can be bought or sold from the ETF at net asset value (NAV). Only Authorized Participants such as market makers or institutions can purchase or redeem shares directly from the Fund. All other investors can buy or sell ETF shares at the market price, over an exchange. The creation unit size can vary by ETF and ranges from 25,000 to 600,000 shares.

The process by which Authorized Participants transact directly with the fund on an “in kind” basis. Creations/Redemptions occur in Creation Unit aggregations or multiples thereof and involve delivering a specified basket of securities to the fund in exchange for ETF shares and vice versa. Creations/Redemptions occur at the end-of-day Net Asset Value of the fund to avoid dilution of existing fund shares. Creations/Redemptions involve an “in kind” transfer of securities, a transaction that is not a taxable event for the fund. This allows imbalances between supply and demand for ETF shares to be satisfied without having an adverse taxable effect upon existing ETF shareholders.

Different than non-exchange traded mutual funds, which are bought and sold directly from the fund company at the NAV at the end of the day, ETFs trade at prices determined by the market forces of supply and demand. A fund that trades at a price less than its NAV is said to trade at a discount to its NAV.

The ETF Administrator is responsible for several activities for an ETF, including calculating the daily NAV, acting as transfer agent, and providing the reporting necessary for financial reporting and filings with the SEC.

Most ETFs have an independent third party custodian who is responsible for holding all of the securities in an ETF. This role is segregated from the investment advisor and portfolio manager and provides an additional layer to help mitigate risks.

Investors can purchase and sell shares on the secondary market through a broker. Secondary-market transactions occur at, above or below the ETF indicative NAV at market prices that change throughout the day, based on the supply and demand of Fund shares and on changes in the prices of the Fund’s portfolio holdings (see Indicative Value). The market price of shares can be different from the NAV of the Fund.

ETFs are open-ended registered investment companies under the Investment Company Act of 1940, which have received certain exemptive relief from the SEC to allow secondary market trading in the ETF shares.

ETNs are debt securities and are linked to stock, bond, currency, or commodity indexes. Investors that keep their ETN to maturity receive a cash payment calculated from the beginning trade date to the maturity date. Applicable fees are deducted and can reduce the value of the payment. ETNs can also be sold before maturity on the exchange where they trade or they can be redeemed in large blocks. ETNs carry issuer credit risk and another risk is taxation as the IRS could change the tax rules affecting ETNs.

The annual fee that all funds and/or ETFs charge their shareholders. The fee is usually expressed as a percentage of the fund’s average daily net assets. This ratio includes the management fee, trustee’s fee, index license fee, and 12b-1 fee, among others. It does not include the commissions you pay to buy and sell ETF shares, or the costs incurred by the fund in trading its securities.

The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for securities firms doing business in the United States and is dedicated to investor protection through regulation and complementary compliance and technology-based services.

A fund seeking to achieve its investment objective by investing primarily in other funds or exchange-traded funds.

A measure of the intraday net asset value (NAV) of the exchange-traded fund (ETF), which gives an updated measure of the value of the investment based on its assets less its liabilities. An investment’s NAV is usually calculated at the end of the trading day, but the indicative NAV measure gives a more real-time view of this value. Note that indicative NAV is not the price at which you can purchase the instrument; it is only used as a reference for the investment’s underlying value. In many cases, the ETF may trade at a premium or discount to the NAV due to various factors such as supply and demand, and expectations. The symbol for most indicative values is the ETF ticker symbol with an “.IV” (ETF.IV)

Indicates the approach of an investment manager in selecting securities. For example, a certain manager may be value oriented, whereas another may emphasize growth.

Lead market makers are firms responsible for providing continuous, two-sided markets and liquidity.

Ability to rapidly buy or sell an asset without substantially affecting the asset’s price. Liquidity also refers to the relative ease with which an asset can be converted into cash.

Total value of a company. Total number of shares multiplied by the price of a share.

The total return of an ETF based on its market price at the beginning and end of the holding period.

The market price of an ETF is the price at which it can be bought or sold. This price is mostly determined by an indicative value that is disseminated every 15 seconds throughout the day. It can be affected by the market forces of supply and demand.

Or NAV is the value of each share of a fund as determined by the value of its underlying holdings, including any cash in the portfolio. NAV is calculated by dividing a fund’s total net assets by its number of shares outstanding. Shares in ETFs (with the exception of creation units) are bought and sold at the market price, which can differ from NAV. In calculating NAV, a Fund generally values its investment portfolio at market price.

The total return of an ETF based on its NAV at the beginning and end of the holding period.

Unlike regular mutual funds, which are bought and sold directly from the fund company at the net asset value of their portfolio securities, ETFs trade at prices determined by the market forces of supply and demand. A fund that trades at a price higher than its NAV is said to trade at a premium to its NAV.

Required by securities laws and issued by mutual fund companies and ETFs, the prospectus is a legal document that discloses the investment objectives of the fund, operating history, fund management, management fees, portfolio holdings, and other related financial data. Brokers are required to give a prospectus to investors before they invest in an ETF.

Principal risks that may affect ETFs include but are not limited to liquidity risks, trading risks, early close risk, fund of funds risk, underlying ETF risk, equity risk, fixed income risk, foreign currency risk, and/or foreign securities risk. Risks are typically disclosed in the fund’s prospectus.

Federal agency that regulates U.S. financial markets, also known as SEC.

These are fees to offset the fund’s transfer and other transaction costs associated with the issuance and redemption of Creation Units of shares. These are disclosed in the fund’s prospectus.

An ETF whose holdings are disclosed daily after the close of trading on the listing Exchange and prior to the opening of trading on the Exchange the following day.

The lettering system used to identify a stock, mutual fund, or ETF on an exchange. Every ETF has one.

Indicates the total amount of assets, including cash, that a fund holds as of a certain date.