ETF Glossary of Terms
A
Active ETF
An exchange traded fund that is actively managed, with portfolio decisions made by a fund manager.
Active Management
An actively managed ETF is an exchange traded fund with a portfolio manager who decides which securities to buy and sell.
Agency Trading
A method of trading where a broker executes ETF trades on behalf of an investor, seeking the best available execution in the market.
Arbitrage (Pricing)
The process by which authorised participants (APs) exploit differences between an ETF’s market price and its net asset value (NAV), helping to keep prices aligned.
Asset Allocation
The distribution of an investment portfolio across different asset classes, such as equities, bonds, or commodities, to balance risk and return.
Authorised Participant (AP)
A financial institution appointed by an ETF provider to create and redeem ETF shares, helping to keep ETF prices aligned with their net asset value (NAV).
B
Benchmark
A standard index against which an ETF’s performance is measured.
Bid-Offer Spread
The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (offer). Also known as the bid/ask spread.
Block Trade
A large order of securities executed outside of the open market to minimise price disruption.
Brokerage Fee
A charge applied by a broker for executing ETF trades on behalf of an investor.
C
Central Counterparty (CCP)
A financial institution that acts as an intermediary between buyers and sellers of securities or derivatives in European markets, reducing counterparty risk.
Closed-End Fund
An investment vehicle that raises a fixed amount of capital through an initial public offering (IPO) and then lists on an exchange. Unlike ETFs, Closed End Funds do not continuously issue or redeem shares.
Collective Investment Scheme (CIS)
Counter Party Risk
The risk that the other party to a financial contract (such as a swap or derivative) fails to meet its obligations.
Costs and Spreads
The expenses associated with trading ETFs, including brokerage fees, bid/ask spreads, and fund management fees.
Creation and Redemption Mechanism
The process by which authorised participants (APs) create new ETF shares by delivering a basket of underlying assets to the ETF issuer or redeem shares in exchange for those assets.
D
Discount
When an ETF’s market price is lower than its net asset value (NAV).
E
European Securities and Markets Authority (ESMA)
The EU authority that works to enhance investor protection and promote orderly financial markets.
Exchange Traded Fund (ETF)
An investment fund traded on an exchange. It holds a basket of securities designed to track the performance of an index, sector, or asset class.
Execution Risk
The risk that a trade is not completed at the intended price or volume due to market conditions.
F
Fund Management Charge
The ongoing cost paid to the ETF provider for managing the fund. Also referred to as the fund management fee.
G
H
I
J
K
L
Liquidity
The ease with which investors can buy or sell shares without significantly impacting the asset’s price.
M
Market Impact
The effect that a trade, particularly a large one, has on the market price of a security.
Market Makers
Financial intermediaries that provide continuous buy and sell quotes for ETF shares, supporting trading efficiency and liquidity.
Market Price
The price at which ETF shares trade on an exchange, determined by supply and demand. It may be above (premium) or below (discount) the net asset value (NAV).
MiFID II (Markets in Financial Instruments Directive II)
EU regulation that standardises investor protection, transparency, and reporting requirements across European financial markets.
N
NAV Trading
A method of trading ETFs at, or close to, their net asset value (NAV), usually facilitated by authorised participants (APs).
Net Asset Value (NAV)
The per share value of an ETF, calculated by subtracting liabilities from total assets.
Non-Transparent Active ETFs
Actively managed ETFs that do not disclose their full portfolio holdings daily, instead reporting periodically or using alternative disclosure methods.
O
On-Exchange Trading
The buying and selling of ETF shares directly on a stock exchange at quoted market prices.
Open-Ended Investment Company (OEIC)
A type of collective investment fund in the UK that issues and redeems shares based on investor demand.
Over-the-Counter (OTC) Trading
ETF transactions carried out away from a stock exchange, often through electronic platforms or bilateral arrangements.
P
Passive Management
An investment approach in which an ETF seeks to replicate the performance of a chosen index rather than outperform it.
Physical ETF
An ETF that directly holds the securities of the index it tracks.
Premium
When an ETF’s market price is higher than its net asset value (NAV).
Primary Market
The market where authorised participants (APs) interact with ETF providers to create or redeem shares in exchange for underlying securities.
Q
R
Replication
The method an ETF uses to match the performance of a benchmark index.
Request-for-Quote (RFQ) Platform
The per share value of an ETF, calculated by subtracting liabilities from total assets.
Risk Trading
A trading method in which a broker or dealer takes the opposite side of an investor’s trade, assuming the risk of hedging the position.
On-Exchange Trading
The buying and selling of ETF shares directly on a stock exchange at quoted market prices.
S
Secondary Market
The market where investors trade ETF shares with each other on an exchange.
Smart Beta
An index strategy that weights securities by factors such as value, growth or momentum.
Slippage
The difference between the expected price of a trade and the actual executed price.
Synthetic ETF
An ETF that uses derivatives, such as swaps, to replicate the performance of an index instead of directly holding the underlying securities.
T
Thematic Investing
An approach targeting specific long-term trends or themes.
Tracking Error
A measure of how closely an ETF follows its benchmark index.
Transparency
The disclosure of an ETFs holdings, typically provided on a daily basis.
U
Undertakings for Collective Investment in Transferable Securities (UCITS)
A European regulatory framework that sets rules for diversification, liquidity, and investor protection in investment funds.
