Glossary · 13 terms
ETFs & Index Funds
All etfs & index funds terms in the EquitiesAmerica.com glossary — plain-English definitions for American investors.
Authorized Participant(AP)
An authorized participant (AP) is a large financial institution — typically a major bank or market maker — that has a contractual agreement with an ETF issuer to create or redeem large blocks of ETF shares directly with the fund.
Bond ETF(fixed-income ETF)
A bond ETF is an exchange-traded fund that holds a portfolio of bonds — government, corporate, municipal, or a blend — and trades on a stock exchange, providing fixed-income exposure with stock-like liquidity.
Creation Unit
A creation unit is a large, fixed block of ETF shares — typically 25,000 to 100,000 shares — that authorized participants exchange with ETF issuers in the in-kind creation and redemption process.
Exchange-Traded Fund(ETF)
An exchange-traded fund (ETF) is an investment fund that holds a basket of securities and trades on a stock exchange throughout the day, just like an individual stock.
Expense Ratio(management expense ratio)
The expense ratio is the annual fee that a fund charges shareholders, expressed as a percentage of average assets under management, covering the cost of operating the fund.
Index Fund(passive fund)
An index fund is a type of investment fund designed to replicate the performance of a specific market index, such as the S&P 500, by holding the same securities in the same proportions.
Inverse ETF(short ETF)
An inverse ETF is designed to deliver the opposite of its benchmark's daily return, allowing investors to profit when a market index or sector declines in value.
Leveraged ETF(2x ETF)
A leveraged ETF is a fund that uses financial derivatives and debt to amplify the daily returns of its underlying index, typically by a factor of two or three times.
Net Asset Value(NAV)
Net asset value (NAV) is the per-share value of a fund, calculated by dividing the total value of all assets minus liabilities by the number of outstanding shares.
Sector ETF(sector fund)
A sector ETF is an exchange-traded fund that concentrates its holdings in companies from a specific segment of the economy, such as technology, healthcare, energy, or financials.
SPY (SPDR S&P 500 ETF)(SPY)
SPY is the ticker symbol for the SPDR S&P 500 ETF Trust, the oldest and most heavily traded ETF in the world, managed by State Street Global Advisors and designed to track the S&P 500 Index.
Total Return
Total return is the complete gain or loss on an investment over a period, including both price appreciation (or depreciation) and any income received such as dividends or interest payments.
Tracking Error
Tracking error measures how closely an index fund or ETF follows its benchmark index, expressed as the standard deviation of the difference between fund returns and index returns over a given period.