Glossary

Adjusted Cost Base

The cost used by investors to calculate capital gain/ losses upon sale of an ETF for tax purposes. The adjusted cost base may be different from the initial cost of obtaining the ETF, such as adjusting for capital gains distribution.

Active Management

The process of actively selecting securities, as opposed to passively seeking to track an index. Active portfolio managers select investments based on different criteria, or combination thereof, including fundamental research, market forecasts, economic data and other indicators to assist them in making investment decisions.

Alpha

Alpha is a risk adjusted measure of the “active management” return on an investment. Positive alpha means a portfolio’s risk-adjusted performance was higher than its benchmark index. Negative alpha means a portfolio’s risk adjusted performance was less than that of its index. The alpha of an index ETF should equal that of the accepted beta of the benchmark.

Asset Allocation

The description of the way in which the assets in question are distributed (allocated) across the types of assets (investments) included in a portfolio.

Asset Class

Category of Assets included in an Asset Allocation. Each Class is a component of the allocation. These typically include cash, fixed income, equities, real estate, etc.

Assets under Management

The Dollar Value (Assets) under the investment responsibility (management) of the Manager.

Authorized Participant

This term refers to large financial institutions, such as specialist firms and market makers, which are involved in the creation and redemption activity of ETF shares.

Backwardation

A condition that occurs when the price of a commodity for delivery on a future date is lower than the spot price for delivery of the commodity today. When this condition occurs, it is beneficial for ETFs that are long the futures contracts expiring and in need of rolling them into new futures positions (this is because the proceeds from disposing of the near contracts reaching expiration is greater than the amount to be paid for similar underlying exposure in subsequent months futures contracts).

Balanced Funds

Category of Funds that invest their assets in both stocks and bonds, as opposed to being dedicated to either one or the other.

Basis Points

A basis point is a unit equal to 1/100 of a percentage point. Often described as bp, where 100bps = 1 percentage point.

Benchmark

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

Beta

A measure of volatility. If a fund has a beta of 1, then it has the same volatility as its benchmark index. 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% when the market rises 10%.

Bond

A bond is a security reflecting the indebtedness of the issuer to its holder (creditor).

Call Option

An agreement that represents a right, but not an obligation to “call” (obtain) the underlying security at a price – the strike price – specified in the option contract at the onset of the transaction (at which time the buyer of the call paid a premium for the right/privilege).

Capital Gains Distribution

A non-cash payment to investors on the ETF’s realized profit on the sale of its underlying securities through issuing more units. Capital gains distributions are declared by ETFs to avoid paying taxes on income earned, and are usually made at the year-end. For related terms, please refer to Phantom Distribution.

Commission

Transaction fee paid to a broker for executing a securities trade. Commission amounts vary and are often dependent on the size of the trade, the frequency of the trade, and sometimes the size of the brokerage account. Discount brokers charge lower commissions for trades than full service brokers.

Contango

A condition that occurs when the price of a commodity or other asset is higher on a future delivery date than the current spot price for delivering the asset. This condition is detrimental for ETFs investing in commodities via futures contracts, in that they receive less proceeds from the sale of their contracts nearing expiry than that required to maintain similar exposure going forward – a condition know as “negative roll yield”.

Counterparty Risk

The risk that an institution defaults and fails to pay on a credit derivative, a credit default swap, insurance contract, a trade or another financial transaction. ETFs that use swaps or derivatives may be exposed to counterparty risk. ETNs too are subject to counterparty risk because they rely on the creditworthiness of the issuing financial institution.

Creation Unit

The smallest block of shares in an Exchange Traded Fund that can be purchased or redeemed directly from the fund company at net asset value. Creation units are usually transacted in 50,000-share increments. Instead of receiving cash, the seller of a creation unit would receive a basket of securities that corresponds to the portfolio holdings in a particular ETF.

Creations/Redemptions

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 (NAV) 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.

Custodian

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 risk.

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

DRIP

A plan (Dividend Re-Investment Plan) offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.

Equal Weight Indexing

A methodology where the weights assigned to the constituent securities aren’t determined by their market capitalization, but rather by the number of securities comprising the index in question, since the weight in each security is derived by taking 100% and allocating that 100% equally across all the securities included in that index. Rebalancing back to EW usually occurs at a pre-set frequency (quarterly, semi-annually, or annually).

Exchange Traded Fund (ETF)

ETFs or Exchange Traded Funds are low-cost Index Funds that trade like stocks. ETFs can be bought or sold when the stock market is open for trading. ETFs can be sold short, leveraged with margin, hedged with call or put options or bought and held.

Fund of Funds/ETF of ETFs

A Fund seeking to achieve its investment objective by investing primarily in other Funds or Exchange Traded Funds.

Fundamental Indexing

A methodology aimed at linking the composition of an index to underlying fundamental factors (as opposed to “defaulting” to market capitalization weighting). In a fundamental index, the weights assigned to the securities comprising the index are a function of how each security scores on the fundamental criteria in question. Research Affiliates Fundamental Indexing makes use of cash dividends (5 Yr average), free cash flow, total sales (5 Yr average), and book equity value (current period book value).

Indexing

A strategy aimed at owning what is in the index, this is a passive strategy where changes made are mechanically implemented to reflect changes occuring inside the index itself.

Indicative NAV

An Indicative NAV (iNAV) is calculated and published every 15 seconds of intra-trading day to measure the last sale prices of the securities specified for creation and redemption plus any estimated cash amounts associated with the creation unit, all on a per-ETF share basis. It is designed to give investors a sense of the relationship between a basket of securities representative of those owned in the ETF and the share price of the ETF on an intraday basis.

Indicative Optimized Portfolio Value

Intraday value of an ETF, published every 15 seconds, calculated based on the last traded price of the Fund’s underlying securities.

Inverse ETFs

Inverse ETFs aim to deliver the opposite performance of a particular stock, bond or commodity index. Most short ETFs attempt to duplicate daily index returns in the opposite direction. Some short ETFs aim for daily index returns in the opposite direction but with leverage or magnified performance.

Leveraged ETFs

The main objective of a leveraged ETF is to deliver magnified performance of a particular stock, bond or commodity index. Most leveraged ETFs attempt to duplicate daily index returns by two or three times (and rebalance daily so as to provide 2 or 3X the daily performance of the subsequent trading day’s index performance).

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.

Management Expense Ratio

The expense ratio of a mutual fund or ETF covers the cost of investment management, legal and administrative expenses. The expense ratio does not include the cost of acquiring a fund, such as commissions or sales loads, and it’s expressed as a percentage of the fund’s average daily net assets.

Management Fee

The compensation perceived by a money manager for his/her services in managing/administering investments.;

Market Capitalization

Total value of a company in the market place. Arrived at by multiplying the total number of shares outstanding by the most recent market price of its shares.

Market Capitalization Indexing

An indexing methodology where the weights inside of an index reflect the size of a company when looking at its outstanding shares multiplied by their market price.

Maturity

The term (end date) of an investment such as a bond. Upon that date being reached, the holder of the security in question generally expects to get back the amount of money originally invested in the security in question (face value, typically for a bond).

Modified Market Capitalization Index

This index is set up much like a Market Capitalization Weighted Index, however, there has been an adjustment to the weights of one or more of the components. This is typically done to avoid having an index that has one or a few stocks representing a disproportionate amount of the index value.

Net Asset Value

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 outstanding shares. Shares in regular open-end mutual funds are bought and sold at (end of day) NAV, but shares in ETFs (with the exception of creation units) are bought and sold at the market price, which can differ from NAV.

Performance Fee

An extra layer of compensation for the Manager that kicks in upon meeting some pre-stipulated criteria – such as exceeding benchmark returns by a pre-set %. Once that level has been reached or exceeded, the manager then partakes in the extra returns by a pre-determined % of the excess return.

Phantom Distribution

A form of capital gains distribution in which the ETF issues new units equivalent to the amount of the capital gains distribution, only to immediately consolidate its units. Investors are left with the same units before and after a phantom distribution, but the capital gains distribution is taxable – at half of the ordinary income rate.
Investors are also able to increase their adjusted cost base (ACB) by the amount of the “in-kind” transaction, such that when they sell the shares, they will reduce their realized capital gains.

Portfolio Turnover

Portfolio turnover measures the frequency by which securities within a mutual fund or ETF are bought and sold. Turnover is determined by the dollar value of buys or sells (whichever is less) during a year divided by the total assets in the Fund. For example, a mutual fund with $200 million in assets that has $100 million of sales and $100 million worth of purchases (using the same proceeds) during the year would have a 50% turnover rate, indicating an average holding period of two-years. A churn rate of 100% signifies that a fund manager has sold the fund’s entire portfolio and bought new holdings during the course of a year. High portfolio turnover translates into higher investment costs whereas low portfolio turnover is better (all else equal) because it lessens the impact of trading and tax related expenses.

Premium/Discount

The amount (stated in dollars or percent) by which the selling or purchase price of an ETF is greater than (Premium) or lower than (Discount) its face amount/value or net asset value (NAV). See also Net Asset Value (NAV).

Price

The price of an ETF as determined by the market forces of supply and demand. Unlike regular open-end mutual funds, which are always bought and sold at NAV, the market price may differ from NAV. Most ETFs typically trade at market prices near their NAVs – due to the existence of the creation/redemption mechanism which otherwise allows for an arbitrage opportunity to materialize.

Prospectus

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.

Tail Risk/Black Swan

A form of portfolio risk that arises when the possibility that an investment will move more than three times the normally expected amount from a given point.

Ticker

The lettering system used to identify a stock, mutual fund, or ETF on an exchange. Also called trading symbols.

Tracking Error

The effective difference between the performance of an Exchange Traded Fund and its underlying Index. Tight tracking would reflect an ETF matching the returns of its underlying index when its MER is taken into account. Anything greater than is a reflection of the ability of the manager to execute on his/her strategy of providing investors with the returns of the underlying index – the greater the discrepancy, the poorer the manager’s skill at delivering these returns.

Volatility

Volatility is determined by the price movement (rise or fall) of a security. Securities that experience sharp increases or declines within a short time frame are considered more volatile than those that don’t.

Volume

Total number of shares or contracts traded on a security. Volume data is tracked and reported daily by major stock exchanges around the world./p>

Year-to-date (YTD)

The period beginning at the start of the calendar year up until the most current date.

Yield (Bond)

A measure taking into account the interest payments to be received from owning a bond to its maturity date, as well as repayment at maturity, relative to the price paid for that bond.

Yield (Roll)

This is the yield achieved by the rollover of futures contracts into new contracts. Profiting from roll yield is a common goal for many strategies used by traders in futures.

Yield Curve

A graph that illustrates the relationship between the yields of bonds with the same credit quality, but with varying maturities. A positive yield curve means short term interest rates are lower versus long term rates. A negative yield curve is just the opposite, whereas a flat yield curve shows little variance in the yields of short term bonds and long term bonds.

Yield Spread

The difference in yield (how much an investment pays – factoring in both interest, but also future principal repayment value) of two different investments. For instance, between corporate bonds and government bonds of similar term (remaining term to maturity).