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ETF Glossary

Before diving into our ETF courses at ETF Training Hub, it’s important to understand key industry terms. Exchange-traded funds (ETFs) come with specialized terminology that can impact your ability to analyze, trade, and invest effectively. Our ETF glossary provides clear, concise definitions of essential terms: from “liquidity” and “tracking error” to “UCITS” and “market makers.”

Whether you’re new to ETFs or looking to refine your expertise, this glossary will help you build a strong foundation. Mastering these terms will ensure you get the most out of your learning experience and confidently navigate the ETF landscape.

Course contents

A
  • ​Active ETF: An ETF managed by a portfolio manager who selects securities rather than tracking an index.
  • Accumulating ETF: An ETF that reinvests dividends instead of distributing them to investors.
  • Authorized Participant (AP): Financial institutions that create and redeem ETF shares directly with the ETF issuer.
B
  • Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an ETF share.
  • Bond ETF: An ETF that invests in bonds and provides exposure to fixed-income securities.
C
  • Creation/Redemption Process: The mechanism by which APs create and redeem ETF shares, helping to keep the ETF’s price aligned with its net asset value (NAV).
  • Capital Markets Desk: A specialized team within an ETF issuer that helps institutional investors trade ETFs efficiently by providing liquidity insights, market intelligence, and trading strategies.
  • Currency Hedged ETF: An ETF that aims to reduce currency risk by using financial instruments like forward contracts.
D
  • Distributing ETF: An ETF that pays dividends to shareholders rather than reinvesting them.
  • Diversification: A strategy of spreading investments across multiple assets to reduce risk.
E
  • ETC (Exchange-Traded Commodity): A security that tracks the performance of a commodity or basket of commodities.
  • ETN (Exchange-Traded Note): A debt security issued by a bank or financial institution that tracks an index but does not own the underlying assets.
  • ETF (Exchange-Traded Fund): A pooled investment vehicle that holds a basket of securities and trades on an exchange like a stock.
  • Expense Ratio: The annual cost of managing an ETF, expressed as a percentage of the fund’s assets.
F
  • Fixed-Income ETF: An ETF that invests in bonds or other fixed-income instruments.
  • Fair Value: The estimated value of an ETF based on the market price of its underlying holdings.
I
  • Index ETF: An ETF that aims to track the performance of a specific market index, such as the S&P 500.
  • Inverse ETF: An ETF that aims to profit from declines in a specific index or asset class.
  • Intraday Trading: The ability to buy and sell ETFs throughout the trading day at market prices.
L
  • Leverage ETF: An ETF that uses financial derivatives to amplify returns, often providing 2x or 3x the daily returns of an index.
  • Liquidity: The ease with which an ETF can be bought or sold without affecting its market price.
M
  • Market Maker: A financial firm that facilitates ETF trading by providing liquidity in the market.
  • Market Price: The price at which an ETF trades on an exchange, which may differ from its NAV.
N
  • Net Asset Value (NAV): The total value of an ETF’s underlying assets divided by the number of shares outstanding.
  • Non-UCITS ETF: An ETF that does not comply with European UCITS regulations and may have different investor protections.
P
  • Passive ETF: An ETF that tracks a market index rather than relying on active management.
  • Premium/Discount to NAV: The difference between an ETF’s market price and its NAV.
  • Portfolio Composition File (PCF): A document listing an ETF’s underlying holdings, used by APs for creation/redemption.
R
  • Replication Method: The strategy an ETF uses to track an index. Can be physical (holding actual securities) or synthetic (using derivatives).
  • Rebalancing: The periodic adjustment of an ETF’s holdings to maintain its target index or investment strategy.
  • Risk Trade: A trade executed at a price agreed upon in advance by a buyer and seller, rather than at the prevailing market price, often used for large block trades in ETFs.
S
  • Sector ETF: An ETF that focuses on a specific industry or sector, such as technology or healthcare.
  • Smart Beta ETF: An ETF that uses alternative index weighting strategies to enhance returns, such as value, momentum, or low volatility.
  • Synthetic ETF: An ETF that uses financial derivatives like swaps to replicate the performance of an index rather than directly holding its components.
T
  • Thematic ETF: An ETF that invests in a specific trend or theme, such as artificial intelligence or clean energy.
  • Total Expense Ratio (TER): A measure of an ETF’s overall costs, including management fees and operational expenses.
  • Tracking Error: The difference between an ETF’s performance and the performance of its benchmark index.
  • Trading Volume: The number of ETF shares traded in a given period.
  • TWAP (Time-Weighted Average Price): A trading strategy that spreads out an ETF order over a set period to avoid market impact by using the average price over that time.
  • T+2 Settlement: ETFs settle two business days after the trade date.
U
  • UCITS (Undertakings for Collective Investment in Transferable Securities): A European regulatory framework ensuring investor protection for ETFs.
V
  • VWAP (Volume-Weighted Average Price): A trading strategy used to execute an ETF order at a price that reflects the weighted average of trades over a given period.
  • Volatility ETF: An ETF that tracks market volatility indices like the VIX.
W
  • Wrap Trade: A transaction where a broker or investment firm handles ETF trades in a bundle to achieve better execution prices.
09
How Are ETFs Different to Mutual Funds?
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