For your convenience, we have provided some background information for these commonly used terms. To learn how ETFs can help you pursue your investment objectives, contact your financial professional.
After Tax Held Returns
The return on investment of items held, including all income received and capital gains, calculated by taking expected or paid income taxes into account.
After Tax Sold Returns
The return on investment of items sold, including all income received and capital gains, calculated by taking expected or paid income taxes into account.
A measure of performance on a risk-adjusted basis. Alpha takes a fund's volatility (price risk) and compares the risk-adjusted performance to its benchmark index. The fund's excess return relative to the benchmark's return is its alpha.
The technique of simultaneously purchasing a financial instrument, commodity or currency at a lower price in one market and selling the identical or related product at a higher price in another market to make a profit on the spread between the prices. For ETFs, arbitrage between the net asset value (NAV) and the market value seeks to keep market prices more closely aligned to NAV.
Asset Class Risk
The returns from the types of securities in which a fund invests may underperform returns from the various general securities markets or different asset classes. The securities in the underlying indexes may underperform fixed-income investments and stock market investments that track other markets, segments and sectors. Different types of securities tend to go through cycles of outperformance and underperformance in comparison to the general securities markets.
Authorized Participant (AP)
An AP typically is an institutional investor, specialist or market maker who undertakes the creation/redemption of new fund shares.
Average Bid/Ask Spread
The average amount by which the closing ask price exceeds the closing bid price over the last 25 trading days. The ask price represents the price a buyer is willing to pay and the bid price is the price a seller is willing to sell.
Average Trading Volume
This is the average of the daily trade volume for the last 25 trading days.
Average Bid/Ask Spread
The average amount by which the ask price exceeds the bid price. Essentially, this represents the difference between the highest price a buyer is willing to pay and the lowest price at which a seller is willing to sell.
A market in which future prices are lower in the distant delivery months than the nearest delivery month.
A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. The beta for an ETF measures the expected change in return of the ETF relative to the return of a designated index. By definition, the beta of the Standard & Poors (S&P) 500 Index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the S&P 500 Index in rising markets and 10% worse in falling markets.
As of the time the Funds NAV is calculated, this represents the midpoint between the highest bid and the lowest offer on the listing exchange.
The operations and financial performance of companies in natural resources industries may be directly affected by commodity prices. This risk is exacerbated for those natural resources companies that own the underlying commodity. Commodity prices fluctuate for several reasons, including changes in market and economic conditions, the impact of weather on demand, the impact of interest rate and inflation on production and demand, levels of domestic production and imported commodities, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of commodity prices, which may lead to a reduction in production or supply, may also negatively impact the performance of companies in natural resources industries that are involved in the transportation, processing, storing, distribution or marketing of commodities. Volatility of commodity prices may also make it more difficult for companies in natural resources industries to raise capital to the extent the market perceives that their performance may be directly or indirectly tied to commodity prices.
If the underlying index of a fund concentrates in a particular market, industry, group of industries or sector or asset class, that fund may be adversely affected by the performance of those securities and may be subject to price volatility. In addition, a fund that concentrates in a single market, industry, group of industries, sector or asset class may be more susceptible to any single economic, market, political or regulatory occurrence affecting that market, industry, group of industries, sector or asset class.
Constant Net Asset Value (Constant NAV) Funds
Funds that employ amortized cost accounting, resulting in a constant $1 NAV as assets are valued at the investment price, plus/minus accrued discounts/premiums.
A market in which future prices are higher in the distant delivery months than the nearest delivery month.
Counterparty risk is the risk that a counterparty to a swap contract or other similar investment instrument may default on its payment obligation to a fund. Such a default may cause the value of an investment in a fund to decrease.
APs transact directly with an ETF on an in-kind basis through creations and redemptions in creation unit aggregations. These creation units vary in size, usually between 25,000 and 600,000 ETF shares.
Also referred to as a bond rating, this is one of the principal criteria for judging the investment quality of a fixed income security. Credit quality informs investors of a securitys creditworthiness or risk of default.
Different agencies employ different rating scales for credit quality. Standard & Poors (S&P) and Fitch both use scales from AAA (highest) through AA, A, BBB, BB, B, CCC, CC, C to D (lowest). Moody's uses a scale from Aaa (highest) through Aa, A, Baa, Ba, B, Caa, Ca to C (lowest).
Currency risk is the potential for price fluctuations in the dollar value of foreign securities because of changing currency exchange rates. Because each funds NAV is determined on the basis of U.S. dollars, an investor may lose money if the local currency of a foreign market depreciates against the U.S. dollar, even if the local currency value of the funds holdings goes up.
The custodian holds the inventory of securities that the fund owns and monitors settlement of securities from market trades and in-kind movements.
Depository Trust Company (DTC)
Together with the National Securities Clearing Corporation (NSCC), DTC facilitates clearing and settlement of shares. The creation and redemption of ETF shares happens through DTC.
Derivatives risk is the risk that loss may result from a funds investments in options, futures and swap contracts, which may be leveraged and are types of derivatives. Investments in leveraged instruments may result in losses exceeding the amounts invested. Funds may use these instruments to help track their underlying indexes. Compared to conventional securities, derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus a funds losses may be greater if it invests in derivatives than if it invests only in conventional securities.
This yield is calculated by taking the most recent distribution annualized and dividing by the fund NAV from the as of date. For Funds that distribute monthly, an NA will be displayed if the fund has not distributed within the last 35 days.
The distributor takes orders from APs and facilitates communication between APs and the investment advisor, fund accountant, custodian and transfer agent.
For an equity security, dividend yield is calculated using the (expected) annual dividend divided by the most recent closing price. To calculate annual dividend, we utilize the most recent dividend payment and multiply that payment by the expected frequency over a year. For example, if the most recent dividend for a company is $2.50 and dividends are expected to be paid quarterly (4 dividend payments/year), the annual expected dividend would be calculated as $2.50 x 4 dividend payments/year, or $10.
For bonds with embedded options, this calculation accounts for the fact that expected cash flows will fluctuate with changes in interest rates.
The date used in place of the final maturity for bonds with call, put or prepayment features. This date mathematically incorporates the effect of those optional maturity dates.
Emerging Markets Risk
The risk that securities markets of emerging countries are less liquid, are especially subject to greater price volatility, have smaller market capitalizations, have less government regulation and are not subject to as extensive and frequent accounting, financial and other reporting requirements as the securities markets of more developed countries, as has historically been the case.
Estimated Yield to Maturity (YTM)
The projected rate of return anticipated on a bond if held until maturity. It is considered a long-term bond yield, and expressed as an annual rate. YTM is calculated by applying the current market price, par value, coupon interest rate and time to maturity, and assumes that all coupons are reinvested at the same rate.
The expense ratio represents how much of the funds assets are consumed by fund costs, including administration, operation and management fees. It does not, however, reflect ETF brokerage trading commissions. ETFs typically feature low annual costs because most are passively managed index funds, so differences between two ETFs with similar underlying composition often result from management- and overhead-related expenses.
The fund accountant calculates the daily NAV of the fund as well as the cash component of the portfolio composition file.
Geographic risk is the risk that a funds assets may be concentrated in countries located in the same geographic region. This concentration will subject a fund to risks associated with that particular region, such as general and local economic, political and social conditions.
This is the risk that a funds income may decline due to a decline in inflation (or deflation). If there is deflation, the principal value of inflation-linked securities, such as TIPS, will be adjusted downward, and consequently the interest payments (calculated with respect to a smaller principal amount) will be reduced. If inflation is lower than expected during the period the fund holds an inflation-linked security, the fund may earn less on the security than on a conventional bond.
Indicative Optimized Portfolio Value (IOPV)
IOPV, also called Intraday Indicative Value (IVV), is an estimate of an ETFs fair value, calculated from the intraday prices of its underlying securities. Investors cannot purchase an ETF at the IOPV. However, it can provide a real time estimate of an ETFs discount or premium.
Inflation-Protected Securities Risk
The values of inflation-indexed debt securities are subject to the effects of changes in real interest rates that may change as a result of different factors. In general, the value of an inflation-indexed security, including Treasury Inflation Protected Securities (TIPS), tends to decrease when real interest rates increase and increase when real interest rates decrease. Interest payments on inflation-indexed securities will vary along with changes in the Consumer Price Index for All Urban Consumers (CPI) before seasonal adjustment (calculated by the Bureau of Labor Statistics). Thus generally, during periods of rising inflation, the value of inflation-indexed securities will tend to increase and during periods of deflation, their value will tend to decrease. There can be no assurance that the inflation index used (i.e., CPI) will accurately measure the price increase of a certain good or service. Increases in the principal value of TIPS due to inflation are considered taxable ordinary income for the amount of the increase in a calendar year.
ETFs are created or redeemed through the trading of securities. The AP provides shares of stock to the fund, and the fund in turn provides ETF shares to the AP; no cash changes hands, thereby eliminating tax implications. Once the AP receives the ETF shares, they are then sold to the public on the open market, as shares of stock are.
The advisor is responsible for the day-to-day portfolio management of the fund and for creating the security basket that is part of the daily portfolio composition file (PCF). Creation and redemption activity is based on the PCF. It also serves as the basis for the IOPV, which helps all market participants assess the value of the ETF shares in the secondary market.
Issuer risk is the risk that any of the individual companies that a fund invests in may perform badly, causing the value of its securities to decline. Poor performance may be caused by poor management decisions, competitive pressures, changes in technology, disruptions in supply, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. Issuers may, in times of distress or on their own discretion, decide to reduce or eliminate dividends, which would also cause their stock prices to decline.
An ETF typically does not fully replicate its underlying index and may hold securities not included in its underlying index. Therefore, a fund is subject to management risk. That is, because implementation of the managers investment strategy is subject to a number of constraints, the fund may not produce the intended results.
Though ETFs typically are not actively managed, a fund may be affected by a general decline in the market segments relating to its underlying index. A fund invests in securities included in, or representative of, its underlying index regardless of their investment merit.
The total dollar market value of all of a companys outstanding shares. Market capitalization is calculated by multiplying a companys shares outstanding by the current market price of one share. The investment community uses this figure to determine a companys size, as opposed to sales or total asset figures.
Just like mutual funds, ETFs can track the broader market to varying degrees. How well an ETF relates to a particular underlying index, such as the S&P 500, can help an investor determine whether his or her portfolio is truly diversified and where gaps exist. For instance, an ETF with no correlation (-1.0) to the S&P 500 means it does not follow the broader market at all, while a very high correlation (+1.0) means the ETF moves in lockstep with the broader market. Sometimes called correlation coefficient.
ETFs differ from mutual funds in that they can be traded at current market prices throughout the regular trading session on the secondary market. This provides greater flexibility, as investors can move into and out of positions without waiting for an end-of day NAV calculation.
Market risk is the risk that the value of the securities in which a fund invests may go up or down in response to the prospects of individual issuers and/or general economic conditions. Price changes may be temporary or last for extended periods. Investors could lose money over short periods due to fluctuation in a funds NAV in response to market movements, and over longer periods during market downturns.
Market Trading Risks
ETFs are subject to a variety of trading risks in the marketplace. Following are several examples of those risks.
Absence of Prior Active Market
Although the shares of funds may be listed for trading on a listing exchange and may be listed on certain foreign exchanges, there can be no assurance that an active trading market will develop or be maintained.
Lack of Market Liquidity
Secondary market trading in fund shares may be halted by a listing exchange because of market conditions or for other reasons. In addition, trading in fund shares is subject to trading halts caused by extraordinary market volatility pursuant to circuit breaker rules. There can be no assurance that the requirements necessary to maintain the listing of the shares of any fund will continue to be met or will remain unchanged.
Trading at Prices Other than NAV
Shares of funds may trade at, above or below their NAV. The per share NAV of a fund will fluctuate with changes in the market value of such funds holdings. The trading prices of a funds shares will fluctuate in accordance with changes in its NAV as well as market supply and demand. While the creation/redemption feature is designed to make it likely that a funds shares normally will trade close to the funds NAV, disruptions to creations and redemptions may result in trading prices that differ significantly from NAV. Since foreign exchanges may be open on days when funds do not price their shares, the value of the securities in a funds portfolio may change on days when shareholders will not be able to purchase or sell the funds shares.
Secondary Market Trading Risk
Shares of funds may trade in the secondary market on days when the funds do not accept orders to purchase or redeem shares. On such days, shares may trade in the secondary market with more significant premiums or discounts than might be experienced on
days when the fund accepts purchase and redemption orders.
The sum of each securitys market price multiplied by shares held in the portfolio.
National Securities Clearing Corporation (NSCC)
Together with the DTC, the NSCC facilitates clearing and settlement of shares. The creation and redemption of ETF shares happens through DTC.
Natural Resources Investing Risk
When a fund invests in securities of companies engaged in natural resources activities, the fund may be subject to greater risks and market fluctuations than funds with more diversified portfolios. The value of the funds securities will fluctuate in response to market conditions generally, and will be particularly sensitive to the markets for those natural resources in which a particular issuer is involved. The values of natural resources may also fluctuate directly with respect to real and perceived inflationary trends and various political developments. Natural resource industries throughout the world may be subject to greater political, environmental and other governmental regulation than many other industries. Changes in governmental policies and the need for regulatory approvals may have an adverse effect on the products and services of natural resources companies. In addition, many natural resource companies have been subject to significant costs associated with compliance with environmental and other safety regulations. Such regulations may also hamper the development of new technologies. The direction, type or effects of any future regulations affecting natural resource industries are virtually impossible to predict.
Net Asset Value (NAV)
NAV is a funds price per share, which is calculated by dividing the total value of all the securities in the funds portfolio plus cash, interest and receivables less any liabilities by the number of fund shares outstanding.
Any given fund may invest most of its assets in securities issued by or representing a small number of companies. As a result, a fund may be more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence affecting these companies.
Operating leverage is the extent to which a enterprise's costs are fixed costs versus variable costs. A company with high operating leverage has high fixed costs (low variable costs); as operating leverage increases, revenue growth (decline) translates more into operating income (loss).
Price to Book Value Ratio
A valuation ratio calculated as the market value of all common stock shares of a company divided by the book value of the company. The book value is the sum of capital surplus, common stock and retained earnings.
Price to Earnings Ratio
A valuation ratio calculated as a companys current stock price divided by its earnings per share.
Portfolio Composition File (PCF)
The published securities basket along with the related cash component. Each day this is distributed to the AP and market data vendors as well as service providers.
Price to Cash Flow
A valuation ratio calculated as a companys current price per share divided by cash flow per share.
Price to Sales
A valuation ratio calculated as a companys current stock price by its revenue per share.
Primary Market Trading
On the primary market, APs agree to exchange a defined basket of underlying securities shares for a bundled number of ETF shares or creation units. In the case of a redemption, the AP will exchange ETF shares for the underlying basket of securities. ETFs also include a cash-balancing component to ensure transfer of equal value.
Principal risk is the general term for risk of loss of money when investing in any fund. All investments carry some degree of principal risk that will affect the value of a funds investments, its investment performance and the price of its shares. The principal risks associated with investment in any given fund vary, and are detailed in each funds prospectus. A number of specific principal risks are described in this glossary.
Roll yield is the return (yield) generated from the convergence of a futures contract's price and the spot price of a given commodity. In an instance of backwardation (a market in which future prices are lower in the distant delivery months than the nearest delivery month), roll yield is positive. In an instance of contango (a market in which future prices are higher in the distant delivery months than the nearest delivery month), roll yield is negative.
A standardized yield calculation developed by the Securities and Exchange Commission (SEC) to allow comparison of bond funds based on the most recent 30-day period covered by the fund's filings with the SEC. It reflects dividends and interest earned during the period, after deducting fund expenses.
Secondary Market Trading
On the secondary market, ETF shares are traded like individual stocks on an exchange, with the ticker symbols and intraday pricing. They can be traded using standard market orders (e.g., market, limit, stop orders), margined and sold short. ETFs are generally traded in round lot sizes of 100 shares.
Small-Capitalization Companies Risk
Funds may invest a significant portion of their assets in small-capitalization companies. Stock prices of small-capitalization companies may be more volatile than those of larger companies and therefore the share price of a fund that invests mostly in small-capitalization companies may be more volatile than those of funds that invest a larger percentage of their assets in stocks issued by large-capitalization companies. Stock prices of small-capitalization companies are generally more vulnerable than those of large-capitalization companies to adverse business and economic developments. The stocks of small-capitalization companies may be thinly traded. In addition, small-capitalization companies are typically less stable financially than larger, more established companies and may depend on a small number of essential personnel, making them more vulnerable to loss of personnel. Small-capitalization companies also normally have less diverse product lines than large-capitalization companies and are more susceptible to adverse developments concerning their products.
Total Net Assets
The sum of the total market value of all securities, cash, interest and receivables in the funds portfolio, less any liabilities.
Tracking risk is the risk that a funds performance may vary substantially from the performance of the underlying index it tracks as a result of imperfect correlation between a funds securities and those of the underlying index. Imperfect correlation may result from share purchases and redemptions, expenses, changes in the underlying indexes, asset valuations, foreign currency valuations, market impact, corporate actions (such as mergers and spin-offs), legal restrictions (such as tax-related diversification requirements that apply to the funds but not to the underlying index) and timing variances, among other factors.
The transfer agent keeps the shareholder records and executes creation and redemption orders for ETF shares at the AP level.
A measure of how frequently assets within a fund are bought and sold. The measurement is usually reported for a 12-month time period and is calculated by dividing either purchases or sales by average monthly net assets. In this context, turnover relates solely to changes in the funds constituent holdings, not to trading volume.
12 Month Yield
A sum of interest and dividend income a security has provided over the last 12 months divided by the last months ending NAV price. It also includes any capital gains distributed over that period.
Variable Net Asset Value (Variable NAV) Funds
Funds that employ mark-to-market accounting to value assets, resulting in a NAV that will vary based on market conditions.
Volume Weighted Average Price (VWAP)
A trading benchmark calculated by totaling the dollars traded for every transaction (price times number of shares traded), then dividing by the days total shares traded.
Weighted Average Coupon (WAC)
For a portfolio of bonds, this is the sum of the coupons of the underlying bonds weighed by its market value with respect to the total market value of the portfolio. The portfolios current WAC can differ from its original WAC as the underlying securities pay down at different speeds.
Weighted Average Dividend Yield
For a portfolio of equities, this is the sum of the dividend yield of the underlying securities weighed by its market value with respect to the total market value of the portfolio.
Weighted Average Market Beta
For a portfolio of securities, this is the sum of the market beta of the underlying securities weighed by its market value with respect to the total market value of the portfolio.
Weighted Average Market Cap
For a portfolio of equities, this is the sum of the market capitalization of the underlying securities weighed by its market value with respect to the total market value of the portfolio.
Weighted Average Maturity
For a portfolio of bonds, this is the weighted average of the maturities of the underlying bonds. Average effective maturity is calculated by weighing each bond's maturity by its market value with respect to the portfolio, as well as the likelihood of any of the bonds being called. Also known as Average Effective Maturity.
Weighted Average Yield to Maturity
For a portfolio of bonds, this is the sum of the yield to maturity of the underlying securities weighed by its market value with respect to the total market value of the portfolio.