ETF Glossary - Active Management - Creation Unit

Active management

The process of hand selecting securities with the purpose of trying to outperform a benchmark index. Active portfolio managers use economic data, investment research, market forecasts, and other indicators to help make investment decisions.

After tax return

The return from an investment after all income taxes have been accounted for and deducted. The SEC has adopted a number of rule and form amendments requiring mutual funds to disclose standardized after-tax returns. The amendments require a mutual fund to disclose standardized after-tax returns for 1-, 5-, and 10-year periods in the risk/return summary of the prospectus.

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% in a year when the return on the market and stock's beta are both zero. Generally, a low priced investment in relation to its alpha is considered a good choice because of its undervalued status.

American depository receipt (adr)

Receipt for the shares of a foreign based company held in the vault of a U.S. bank. Shareholders of ADRs are entitled to receive all dividends and capital gains. Individuals that want to own a foreign company without buying it on an overseas market can purchase an ADR listed on U.S. exchanges.

American stock exchange (amex)

The AMEX was known until 1921 as the "Curb Exchange", and to this day is sometimes affectionately referred to as the "Curb". The stocks and bonds traded on the AMEX tend to be those of smaller to medium sized companies compared to firms listed on competing exchanges like the NYSE and NASDAQ. In recent years, the AMEX has become a leading developer and listing place for exchange-traded funds or ETFs. The AMEX is located in downtown Manhattan.

Asset allocation

The process of apportioning investments among various asset classes, such as stocks, bonds, commodities, real estate, collectibles and cash equivalents. Asset allocation affects both the risk and return of investors, and is often used as a core strategy in basic financial planning.

Asset class

Refers to the categorization of an asset. Representative asset classes include equities, bonds, commodities, etc.

Authorized participants

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

Basis point

Measurement used to quote bonds. One basis point is equal to 0.01%, or one one-hundredth of one percent. 100 basis points is equal to 1%, whereas 50 basis points would equal one half percent, or 0.50%.

Basket

A unit or group of securities. ETFs are some times referred to as baskets.

Benchmark

A standard index used for measuring the performance of an investment. The goal of most money managers and investors is to outperform their respective benchmark.

Beta

A volatility measurement of a fund or stock versus the Standard & Poor's 500 Stock Index. A fund or stock with a higher beta than the Standard & Poor's 500 will rise or fall greater. To the contrary, a stock or a fund with a low beta will rise or fall less.

Bond

A debt instrument issued by corporations and governments to raise capital. Interest on the outstanding debt is paid to bondholders at specific intervals, with the principal amount of the loan paid on the bond maturity date.

Breakpoints

Mutual funds with front-end loads, or a sales charge, enable investors to reduce front-end sales charges as the amount of that investment increases to certain levels called "breakpoints". Each prospectus will have details on the breakpoints used to reduce the front-end sales charge.

Chicago board options exchange (cboe)

Founded in 1973 the CBOE changed options trading by creating standardized listed stock options. Prior to this time, trading options was largely unregulated and did not conform to the principle of "fair and orderly markets." The CBOE lists options on interest rates, individual stocks, and various market indexes. The CBOE is home to heavily traded ETF options on NASDAQ 100 (QQQ) and SPDRs (SPY). The exchange is located in downtown Chicago, IL.

Closed-end fund

Investment company products that issue a fixed number of shares through an initial public offering. Closed-end funds trade like stocks on an exchange and their net asset value can be higher or lower than the traded share price of the fund.

Closet index fund

An actively managed fund that closely mimics the volatility and performance of an index fund.

Commission

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

Commodity indexes

Indexes that measure either the price or performance of physical commodities, or the price of commodities as represented by the price of futures contracts listed on the commodity exchanges.

Contrarian

Describes an investor that believes and does the exact opposite of what the majority of investors are doing at any given moment. For example, contrarians might perceive value in a stock or index that is out of favor, or has performed poorly. Whereas most investors would avoid an out of favor investment, contrarians would buy it in hopes of a turn around or change in market sentiment.

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, making them large dollar transactions limited to large institutions and other authorized participants. 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. This "in-kind" transfer process is unique to ETF's and does not create tax consequences for the seller.