ETF Glossary - Open End Investment Company - Style Drift
Open end investment company
See Mutual Fund
Open end index fund
This type of fund structure reinvests dividends the date of receipt and pays them out via a quarterly cash distribution. This ETF structure is also permitted to use derivatives, loan securities and it's registered under the SEC Investment Company Act of 1940. ETFs that utilize this legal structure include iShares and the Select Sector SPDRs.
Passive management
A market strategy that involves selecting a benchmark index to assure investment performance is the same as the underlying index. Passive investing assures that an investor will not underperform (or outperform) a market index. Passive management is opposite of active management.
Performance drag
A reduction of portfolio performance due to various factors. An example of performance drag occurs when gains within a portfolio are offset by various expenses, such as management fees, transaction costs, research costs, etc. These expenses create a drag or negative effect on the portfolio's performance.
Portfolio turnover
Relates to the frequency with which a money manager is buying and selling securities within a fund. High portfolio turnover translates into higher trading costs whereas low portfolio turnover is better because it lessens the impact of trading and tax related costs.
Premium to nav
The price premium or difference between a fund's net asset value (NAV) and the actual value of its portfolio holdings. Some closed end funds and ETFs may trade at a premium to NAV.
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.
Russell indexes
In 1984, Frank Russell Company created the Russell family of stock indexes as part of a more accurate and comprehensive system for evaluating the performance of investment managers. Russell now maintains 21 U.S. stock indexes and has launched similar broad-market and style indexes in Japan.
R2
R squared measures the correlation of a fund's movement in comparison to its category benchmark. An R squared score of 1.00 would indicate a perfect correlation, whereas a score of 0.00 indicates no correlation.
Sector rotation
A strategy that uses elements of market timing to identify business sectors of the economy that are in a position to either under or outperform. For example, if an investor owned the iShares Dow Jones U.S. Utilities ETF (AMEX: XLU), but felt this index was ready to underperform versus other sectors, one might consider selling this holding in favor of another one with a better outlook. In short, this particular investor would be exiting or rotating out of one sector for another.
Securities and exchange commission (sec)
Federal agency created by the Securities Exchange Act of 1934 with the primary mission of protecting investors and maintaining the integrity of the securities markets. The SEC has five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year.
Sec yield
A yield calculation developed by the SEC to standardize yield data for mutual funds, close-end funds, and ETFs. The calculation uses the fund's net investment income over the last 30 days, minus income generated from capital gains or other sources. SEC yields are often quoted for bond funds.
Share classes
Some mutual funds use multiple share classes for the same underlying portfolio. For example, Class A shares would allow an investor to pay an upfront sales charge to enter a fund, whereas a Class B share would defer the sales charge based on how long the investor stays in the fund. Some mutual fund families only offer conventional share classes. Others, like Vanguard's VIPERs are offering ETF versions of their funds.
Sharpe ratio
A measure of a fund's historical returns adjusted for risk or volatility. The calculation is fund return minus the return on 3-month treasury bills divided by the fund standard deviation.
Small cap
Refers to companies with a market capitalization between $1 billion and $250 million.
Style drift
Style drift happens when a fund diverts from its prospectus defined investment strategy to pursue another course.
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