ETF Definition, ETF Definitions

By: EconomyWatch   Date: 4 August 2009

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It is important for investors and traders to be familiar with some of the important ETF definitions.

 

ETF Definitions

Here are some of the key ETF definitions:

     

     

  • Active management - This is the process of hand selecting securities with the aim of outperforming a benchmark index.

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  • Alpha: A mathematical measurement of the amount of return expected from an investment. For example, an alpha of 1.20 indicates that a stock is projected to rise 20% within a year when the return on the market is zero.

  • Asset class: This is a way of categorizing an asset. Some of the asset classes are equities, bonds and commodities.

  • Basket: A unit or group of securities. An ETF is sometimes also called as a basket of securities.

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  • Expense ratio - The annual fee charged from shareholders. It is expressed as a percentage of a fund's average daily net assets.

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  • Exchange Traded Fund (ETF): It is an emerging class of a low cost index fund, which trades like stocks.

  • DIAMONDs - These are shares in the Diamonds Trust Series I ETF, which tracks the Dow Jones Industrial Average.

  • Indexing - Investment strategy aimed at matching the exact performance of a specific market or benchmark index.   

  • Leveraged ETFs - These are designed to amplify the performance of the underlying benchmark indexes.

  • HOLDRs (Holding company depository receipts) - This is a type of ETF marketed by Merrill Lynch. Unlike other ETFs, HOLDRs can only be bought and sold in increments of 100 shares.

  • Net Asset Value (NAV) - The value of each share of a fund as determined by the value of its underlying holdings, including any cash in the portfolio.

  • NAV return - The total return of an ETF on the basis of its NAV at the beginning and end of the holding period. This may be different from the market return of the ETF.

  • Passive management - A strategy involving selecting a benchmark index to assure investment performance reflecting that of the underlying index.

  • Premium to NAV - The buying and selling price of ETFs is 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.

  • Qubes (QQQ) - An ETF that trades under the ticker symbol QQQ and tracks the Nasdaq-100 index.

  • SPDRs - A group of ETFs managed by SSgA that tracks several Standard & Poor’s and other indexes.

 

 


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