Glossary
Contents
A
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Authorised Participant (AP): A financial institution (usually an investment bank or specialist market maker)
authorised to create and redeem ETF shares directly with the ETF issuer in the primary market. -
Asset allocation: The process of allocating your portfolio (money) between asset classes, sectors and/or regions. Asset allocation will depend on the goals, risk appetite and investment horizon of the portfolio manager.
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Asset class: The different types of assets you can invest in, such as equities, fixed income, cash, commodities, currencies, cryptocurrencies, property, etc.
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Ask price: The price at which a seller is willing to sell a security, also known as an asset. This is the opposite of a bid price.
B
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Bid price: The price at which a buyer is willing to buy a security, also known as an asset. The opposite of an ask price.
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Bid-offer spread: The difference between the price at which a market maker will buy an ETF (bid) and the price at which they will sell it (offer). The implicit transaction cost of trading an ETF on exchange.
C
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Creation unit: The minimum block of ETF shares that an Authorised Participant can create or redeem in the primary market - typically 50,000 to 100,000 shares.
E
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Exchange Traded Fund (ETF): A pooled investment fund listed and traded on a stock exchange. ETFs are bought and sold on an exchange in the same way as ordinary shares. They are designed to provide the performance of the underlying index, and the holder is entitled to dividend payments on a periodic basis.
I
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Index: A rules-based list of securities - such as the FTSE 100 or MSCI World - representing a market, sector or strategy. A passive ETF aims to replicate the performance of its index.
M
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Market maker: A firm that continuously quotes bid and offer prices for an ETF on the exchange, ensuring investors can always buy or sell. Competition between market makers helps keep spreads tight.
N
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NAV (Net Asset Value): The official daily price of an ETF - the total value of assets minus liabilities, divided by shares outstanding. Published once per day at market close.
O
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OCF (Ongoing Charges Figure): The annual cost of running an ETF, expressed as a percentage of assets. Also known
as the TER (Total Expense Ratio). Deducted daily from the fund’s assets.
T
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Tracking difference: The cumulative difference between an ETF’s total return and its benchmark index return over a period. A measure of total cost and replication efficiency.
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Tracking error: The volatility of the day-to-day return differences between an ETF and its benchmark. Measures how consistently the ETF replicates its index.
U
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UCITS: Undertakings for Collective Investment in Transferable Securities - the EU/UK regulatory framework governing most European ETFs. Requires asset segregation, diversification limits, and standardised investor disclosure.