Glossary

A

Actively managed ETF

An ETF (see "ETF" for definition) that uses the discretion of a fund manager to select securities rather than following a strict rules-based method. The aim of an actively managed strategy is generally to outperform a reference benchmark (see "benchmark" for definition) over the long term.

Alpha

A measurement of the excess return of a fund in comparison to its benchmark (see "benchmark" for definition).

Ask price

The lowest price that a market participant is willing to sell a security, such as shares in an ETF (see "ETF" for definition). From an investor's perspective, this is the price they would need to pay to buy the shares.

Asset type / Asset class

A general classification to define a security, for example as equity, bond or commodity

AT1

Additional Tier 1 (AT1) capital bonds (see "bond" for definition) are a special type of security issued by European financial institutions. They first appeared after the 2008 financial crisis and are designed to act as a buffer in case of severe financial distress. If the issuer's capital falls below a specific threshold, set by the regulator, the AT1s would be automatically converted into equity or cash to return the capital back to acceptable levels.

AUM

"Assets under management" refers to the total value of the ETF (see "ETF" for definition) at a given valuation point.

B

Basis points (bps)

Unit of measure expressed as one hundredth of one percentage point.

Bear market

Characterises a market in which equity prices are falling and the economy is also in decline. (See "bull market" for the opposite condition.)

Benchmark

An index against which the ETF (see "ETF" for definition) is measured, in terms of relative performance, risk and other useful comparisons.

Bid price

The highest price that a market participant is willing to pay for a security, such as shares in an ETF (see "ETF" for definition). From an investor's perspective, this is the price they would be willing to receive for selling their shares.

Bid-ask spread

The bid-ask spread is the difference between the price at which someone will buy (bid) or sell (ask) a security, including shares in an ETF (see "ETF" for definition). The spread shown takes into account the highest bid price and lowest ask price among all participants.

Bid-offer spread

Also known as the bid-ask spread, or simply "the spread" (see "bid-ask spread" for definition)

Bond

A type of security issued usually by a government, company or agency that pays a defined rate of interest (also known as a coupon) over a given time period, at the end of which the initial amount is repaid.

Broker

A person who arranges transactions between a buyer and a seller. A broker generally receives a commission when the deal is executed.

Bull-market

Characterises a market in which equity prices are rising and the economy is generally sound or expanding. (See "bear market" for the opposite condition.)

Bunds

Fixed income securities issued by the German government.

C

Cash management

A strategy that aims typically to improve the financial returns that an investor would expect from cash. A cash management portfolio would usually include non-cash items such as money market instruments.

China A-shares

Shares of mainland China-based companies that trade on the Shanghai Stock Exchange or Shenzhen Stock Exchange.

Commodity

A basic good that is interchangeable with goods of the same type, with a sample from one producer being largely indistinguishable from another's. Commodities are generally split between those related to agriculture, livestock, energy and metals.

Contingent convertible debt

A specific category of fixed income securities that are designed to be converted into common equity or cash when certain conditions are met. AT1 capital bonds are examples (see "AT1" for more information).

Core ETF

Refers to an ETF (see "ETF" for definition) that may be considered a key component of an average investor's diversified portfolio.

Corporates

A shortened term for corporate bonds, meaning fixed income securities issued by corporations.

Counterparty risk

Sometimes referred to as "default risk", this is the risk that the other party involved in a trade is unable to fulfil its contractual obligation. Counterparty risk is present when an ETF (see "ETF" for definition) uses derivative contracts or securities lending.

Credit rating

Refers to the quality of a company's credit, as determined and assigned by a recognised credit ratings agency.

D

Derivatives

Financial contracts made between two or more parties, in which the value is derived from the underlying asset on which the derivative is based.

Developed market

A country that, in investing terms, has a well-established economy and financial markets. Characteristics include sustained economic growth, high per capita income and foreign access to its capital markets. 

Diversification

Spreading the risk and number of potential opportunities across various asset classes, such as equities, fixed income and commodities. The aim of diversification is to reduce the overall risk of the portfolio.

Duration

A measurement of a bond's (see "bond" for definition) sensitivity to changes in interest rates. Duration is expressed in years, and takes into account factors including how long before the bond matures, its yield and coupons.

E

Emerging market

Refers to a country with an economy that is in relatively early stages of development compared to more mature, established economies. Investments in emerging markets are generally considered to be riskier than those in developed markets (see "developed market" for definition).

Equity

Shares of ownership in a company.

Equity ratio

A financial ratio indicating the relative proportion of equity used to finance a company's assets.

ESG

Environmental, Social and Governance factors, generally stated in terms of how they pertain to a company. These three key factors are often used in measuring the sustainability and societal impact of investment

ETC

Exchange traded commodities (ETCs) are listed debt instruments traded on a stock exchange and backed by a commodity. They are not funds or ETFs.

ETF

An exchange traded fund (ETF) is a pooled investment vehicle with shares that can be bought and sold throughout the day on the stock exchange, in the same way that ordinary stocks and shares are traded.

ETF gestito in modo attivo

Un ETF (cfr. la definizione di "ETF") che si affida alla discrezionalità di un gestore di fondi per selezionare titoli invece di seguire una metodologia basata su regole rigorose. Lo scopo di una strategia gestita in modo attivo è, in generale, di sovraperformare un benchmark (cfr. la definizione di "benchmark") a lungo termine.

ETP

Exchange traded products (ETPs) are a broad category of investment vehicles that include ETFs and ETCs (see above for definitions).

Exposure

The proportion of a fund invested in a particular security, sector or region, usually expressed as a percentage of the overall portfolio. Exposure may also refer simply to the market in which the fund is invested, for example a fund invested in US equities provides an investor with US equity exposure.

F

Factor investing

An investment approach that seeks to identify and invest in securities that display certain quantifiable characteristics. Common examples of factors include Value, Quality and Momentum (see "Value", "Quality" and "Momentum" for definition). A factor strategy may seek to target just one factor or combine multiple factors.

Fixed income

A broad asset class that includes bonds, notes and other securities that pay investors a regular income - either a fixed amount or one that is linked to some benchmark rate - until the security's maturity date. At maturity, the principal amount is repaid to the investors. Some fixed income securities do not have a maturity date, but pay income in perpetuity ("perpetual bonds").

Floating rate bonds

A specific type of fixed income security in which the income payable to investors fluctuates in step with the market interest rates, or some other external measure.

Free float

Free float relates to the amount of a company's shares available for purchase by the public or institutional investors on the open market.

G

Gilt

Fixed income (see "fixed income" for definition) securities issued by the UK government.

H

Hedged

The intended result of reducing the portfolio's exposure to a specific risk, such as the risk of fluctuations between currency exchange rates ("currency hedging").

High yield bond

Fixed income (see "fixed income" for definition) securities that can generally be characterised as having relatively low credit ratings, higher risk of default and higher coupon payments to compensate investors for the increased risks, relative to bonds with better credit ratings.

I

Investment grade

Refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by a recognized credit rating agency. Companies with an investment grade credit rating are generally considered to be lower risk than those with sub investment grade ratings, also known as high yield issuers (see "high yield bond" for definition).

IPO

Initial public offering (IPO) is an event whereby shares in a privately held company are first listed on a stock exchange.

K

KIIDs/KIDs

Key Investor Information Document (KIID, for ETFs) and Key Information Document (KID, for ETCs) are regulatory documents that provide investors with important information about the specific investment.

L

Low beta

A stock that historically has demonstrated lower price volatility compared to the broader market.

M

Market maker

A market maker is an individual or specialist trading firm that provides prices that they would be willing to buy (bid price) and sell (ask price) shares on a stock exchange. Market makers are often referred to as "liquidity providers" because of their ability and willingness to trade large quantities of shares throughout the day.

Market-cap weighting

An index construction methodology whereby the percentage that each security has within the index (its "weighting") is determined by the value of its outstanding securities as a proportion of the overall index value. With a market-cap weighted index, the larger the company is, the larger its position will be within the index.

Maturity

Related to fixed income securities (see "fixed income" for definitio) with a final end date ("maturity date"), this is the length of time until the principal amount of a bond (see "bond" for definition) must be repaid by the issuer.

Mid-cap

Stocks with market capitalisations generally between US$2 billion and US$10 billion. As would be expected, this band of stocks come between large-caps and small-caps.

Momentum

The concept that a stock performing well recently has a tendency to continue performing well.

Multi asset

An investment containing more than one asset class, thus creating a group or portfolio of different types of assets. Examples of asset classes include equities (see "equity" for definition), fixed income securities (see "fixed income" for definition), real estate and commodities.

N

NAV

Net asset value (NAV) is the total value of the fund’s assets, minus any liabilities, taken at a particular valuation point.

O

Offer price

Also known as the ask price (see "ask price" for definition)

Ongoing charges

The Ongoing Charges Figure (OCF) is intended to represent the total annual cost of running the fund, expressed as a percentage. The OCF comprises the fund manager’s fees for running the portfolio, along with other costs, such as for administration, marketing and regulation.

Open-ended fund

A collective investment scheme that can issue and redeem shares at any time, meaning the fund grows and contracts according to investor demand. This differs from a "closed-ended fund" that has a defined maximum number of shares that can be issued.

OTC

An over-the-counter (OTC) trade is where securities or other financial instruments are exchanged directly between two parties, rather than through a stock exchange.

P

Passive

A passive fund is an investment vehicle that is designed to track the performance of a benchmark (see "benchmark" for definition). This differs from an actively managed fund where its manager makes discretionary investment decisions in an attempt to outperform the benchmark.

Performance

The percentage gain (or loss) achieved over a period. The performance of an ETF may be displayed in terms of how it performed relative to its benchmark (the "relative performance" versus its benchmark).

Physical ETF

An ETF (see "ETF" for definition) that invests physically in securities to deliver its performance objective. 

Physical replication

An investment method whereby the ETF (see "ETF" for definition) seeks to replicate the performance of an index by buying and holding the underlying securities of the index. This can be through full physical replication, meaning the ETF buys and holds all securities in the index in the same proportion as the index, or through sampling (see "sampling" for more details). 

Q

Quality

A company with higher quality generally has a stronger balance sheet, more stable earnings and higher margins compared to its average competitor.

R

Risk-on, risk-off

Risk-on, risk-off reflects changes in investment activity and investor sentiment in response to economic conditions. For example, investors may sell what are percieved to be riskier assets and buy less risky assets during pessimistic or volatile market conditions (risk-off), and vice versa when economic conditions are more optimistic (risk-on).

S

Sampling

Sampling is a type of replication method an ETF (see "ETF" for definition) can use when tracking an index. With the sampling replication method, the ETF buys and holds only some of the index constituents, with the expectation that the sample will perform broadly in-line with the index.

Secondary market

The market in which securities, including ETFs (see "ETF" for definition), are traded among investors.

Sharpe ratio

The Sharpe ratio is a measurement intended to show a fund's excess return compared to a "risk free" rate of return. It is often used as an indication of the fund's risk-adjusted performance.

SIPP

A self-invested personal pension (SIPP) is a specific type of pension product that enables the individual to decide how the contributions are invested, subject to guidelines. ETFs (see "ETF" for definition) are generally allowed in SIPPs.

Size

Size is generally measured by a company's market capitalisation, which is the current market value of its total outstanding shares.

Small cap

Generally refers to a company with a market capitalisation of between US$300 million and US$2 billion.

Smart beta

Smart beta is a generic term for any rules-based strategy that uses characteristics other than just geography and market capitalisation to select and weight the securities of the index. Factor investing (see "Factor Investing" for definition) are examples of smart beta strategies.

STRIP bonds

A strip bond is a bond (see "bond" for definition) where the principal and regular coupon payments are sold separately.

Swap

A swap is a derivative  contract where two parties agree to exchange separate streams of cashflows or returns.

Swap overlay

A swap overlay is a technique whereby swaps are used with the objective of improving the ETF's return versus its benchmark (see "ETF" and "benchmark" for definition). For ETFs using this technique, the majority of performance would be expected to come from the physical securities held by the ETF.

Synthetic ETFs

Synthetic ETFs use derivatives such as swaps to seek to track the performance of the benchmark index (see "ETF", "derivative", "swap" and "benchmark" for definition).  The counterparty (usually a bank) promises the ETF provider in an agreement that the swap will return the value of the respective benchmark the ETF is tracking.

Synthetic replication

An investment method whereby the ETF (see "ETF" for definition) seeks to replicate the performance of an index by using derivatives such as swaps (see "derivative" and "swaps" for more detail). Invesco uses unfunded swaps in its synthetically replicated ETFs, known as a "physical with swap overlay" replication method (see above for more detail on this structure). 

T

Tracking error

Tracking error is a measurement of how closely and how consistently an ETF's performance has been, over a period of time, relative to the return of its benchmark (see "benchmark" for definition).

Treasuries

Fixed income securities issued by the US government.

U

UCITS

Undertakings for Collective Investments in Transferable Securities.  European regulatory framework for an investment vehicle that can be marketed across the European Union.

Underlying

The securities of the index that an ETF (see "ETF" for definition) is aiming to follow.

V

Value

A company with a low value is perceived to be inexpensive based on certain fundamental valuation measurements.

Volatility

The degree to which the price (and therefore performance) of a given security, fund, or index varies over a given time period.

Y

Yield

Yield refers to either the interest received from a fixed income security or the dividends received from a share, expressed generally as a percentage of the current price of that security.

YTW

Yield to worst (YTW) is the yield on a callable bond (see "bond" for definition) that assumes a bond is called by the issuer at the earliest opportunity.