ETFs by their very nature are designed to be simple, transparent and tradeable, unfortunately due to our industry’s appetite for complexity and TLA (three letter acronyms), we have muddied the waters. This document is designed to try and provide a description of the various names now used across the industry.
| Name | Description |
| ETF | Exchange Traded Fund, this is a basket of securities across stocks, commodities or bonds. The ETF is normally designed to track an underlying index such that the performance can be tracked real time on the exchange, and they can be traded intraday unlike mutual funds that only trade at the end of the day. Other benefits of ETFs are that they are open ended investments, and they tend to have low fees compared to other investment vehicles. |
| ETN | Exchange Traded Notes, these are very similar to ETFs however rather than holding a basket of securities that are aimed at replicating an index, they do this via a promissory note issued by an institution. Thus, ETNs are regarded as debt securities. |
| ETC | Exchange Traded Commodities, this is more of a marketing term rather than an actual structure, they tend to be ETNs, one aspect that is used to differentiate them is that they tend to be collateralised with the underlying asset. |
| NAV | Net Asset Value, this is the value allocated to the fund at the end of the day by the custodian taking into account price movements during that trading day, fees and other accruals made into the fund. Sometimes tagged in files as NV. |
| iNAV | Intraday Net Asset Value, the value intraday ticking on the exchange. |
| IOPV | Intraday Optimised Portfolio Value, same as inav. |
| AUM | Assets under Management, this is a measure of the size of the fund in fund currency, due to this being an open-ended fund as the fund is more successful the AUM will increase. Some providers supply the AUM at fund size some provide it at shareclass size. |
| Shares Outstanding | The funds are open ended so as they get more successful and more people buy into it them they issue more shares. The tracking of this is done in the shares outstanding. The AUM should be NAV multiplied by Shares Outstanding. |
| Creation Unit | The creation unit is the minimum block of ETF shares that can be created or redeemed from the ETF to the AP. Unit sizes can vary. They can be paid for either through cash or inkind shares for the transaction. |
| In kind / In specie | To create shares of the ETF “in-Kind” the Authorised Participant will deliver a basket of stocks in the appropriate shape in return for the ETF shares. For a redemption the process works in reverse where the AP will deliver the ETF shares in exchange for the inkind securities the ETF holds. |
| In cash | The Authorised Participant can also create with cash instead of exchanging securities. Fees are generally higher as the fund itself has to execute the trades for each security |
| Switchable | Promoters with different share classes within a fund will allow clients to switch between share classes without the same fee impact as creation and redemption, these are known as switchable. |
| Promoter | The provider that provides the marketing and legal structure behind the ETF is known as the promoter, this also allows the grouping of products into appropriate bundles, e.g. iShares Europe. |
| Umbrella | Umbrella, this is an indication of the legal structure behind the fund, as setting up funds and structures is relatively expensive funds that are similar in approach / asset class tend to be embedded within the same umbrella, and these are set up as companies with defined legal entities e.g. iShares VI public limited Company LEI : 549300VML6THE3JJOS76. |
| Fund | Underneath the umbrella, there are defined funds for each ETF objectives, e.g. there might be a fund for S&P 500 and a separate fund for FTSE 100, these are not tradable entities in themselves and do not have ISINs attached to them. The defined Fund CCY defines the value of the official NAV and the valuation of the fund overall. |
| Share Class | Underneath a fund, there can be multiple share classes, these can have different approaches to the same fund, for instance the fund would have different share classes for accumulating, distributing and hedged share classes. All of these Share Classes would roll up to the Fund AUM and the fund allocation will be defined by the apportionment ratio. |
| LEI | Legal Entity Identifier is a 20-character code based on the ISO 17442, providing unique identification of entities participating in financial transactions. This was a structure that was introduced after the Lehman collapse, such that people could identify their counterparty. |
| Total Cash | This should be the cash in the fund used in the NAV calculation by the custodian. This includes all the fees impacts for that specific trading day, sometimes named in the file as TC. |
| Estimated Cash | This is the estimated cash for next day, this should include dividends / fee for the next day, sometimes named in the file as EU. |
| TER / OCF | Total Expense Ratio / Ongoing Charges Figure these are the fees charged by the fund normally expressed in bps or %, TER and OCF are normally identical, but TER does not encapsulate performance or one-off charges. |
| Tracking basket | This is the basket for calculating the real time price of the ETF, this might not be aligned 100% to the index particularly for an optimised basket or during complicated corporate actions. |
| Creation basket | The creation basket represents the shape of the ETF securities at the minimum creation unit level. It is used in the creation process, this can be different to tracking as the ETF issuer maybe altering their exposure in different stocks, or due time restrictions of countries or settlement lag particularly over rebalance. |
| Redemption basket | The redemption basket represents the shape of the ETF securities at the minimum unit level again this can be different to the tracking / creation basket as the ETF Issuer might be altering their position particularly over a rebalance. |
| Odd Lots basket | To replicate an index in proportion you may end up with a number of shares such as 144, but the shares trade on the exchange in units of 100, to avoid any additional charges, the custodian places 100 shares in the creation basket and 44 in the odd lots, the odd lots are then converted to Cash in Lieu (CIL) which the custodian accumulates till they can purchase the appropriate round lot size of shares. |
| Excluded basket | This basket unfortunately now has two separate meanings dependent upon the file type, in PCF excluded assets are stocks that are excluded from the creation basket but are in the tracking baskets (Cash in Lieu) in the FDF structure these are removed from the tracking and purely held as cash, normally this is due to the fact the stocks are not trading and the provider is using their own risk adjusted price. |
| CIL | Cash In Lieu, stock for which the custodian receives cash rather than in kind. |
| PCF | Portfolio Composition File, the originally structured file from the providers, now not normally providing sufficient detail for the funds trading today. |
| FDF | Fund Definition Format, the new file as used by iShares equity globally, more providers are moving to this form of detail. |
| Indicative Nav | Due to timings some European providers start the day with an indicative (or trading NAV) NAV that is updated with the official when known. This should not be confused with the INAV, which confusingly has the same acronym. |
| Official Nav | Due to timings and domicility, some providers provide an indicative NAV prior to market open, this is then updated / confirmed later in the day and is regarded as the official NAV. |
| Apportionment Ratio | Within a Fund, the proportion held by each Share Class, is known as the apportionment ratio and this is used to calculate the NAV and AUM associated with each share class. |
| Fund CCY | The fund has is valued in a particular currency, and this is known as the fund currency. This does not have to be linked to the currency that the ETF is listed on the exchange, as the ETF can be listed on multiple currencies across a range of exchanges or on the same exchange. |
| Benchmark Index | The benchmark index is the index that the ETF attempts to track in terms of performance. |
| Physical | Physical ETFs actually hold the stocks involved in the creation process. |
| Synthetic | Synthetic ETFs, write a swap against a counterparty or multiple counterparties, who then provide the performance return of the Benchmark Index. |
| Securities Lending | Custodians who hold the physical securities can depending upon the prospectus, lend out the securities to increase the performance of the fund / off set fees. As an example, Blackrock can lend out 100% of their physical holding associated with each fund, and they claim 40% of the fee, handing 60% back to the fund. |
| Active | Actively managed ETFs are a relatively new product whereby the fund is opaque and the fund manager has discretion over the stocks bought or sold. |
| Passive | Passive ETFs are funds that passively try and track the Benchmark Index and replicate the performance. |
| Open Ended | ETFs are Open Ended, meaning that they can keep on creating new shares in response to market demand. |
| Market Maker | Market Maker, these are companies that trade on the exchange ensuring that the NAV accurately tracks the underlying performance and allowing other participants to enter at a reflective price. Market Makers can be paid by the providers but more commonly profit off the bid ask spread. Example of market makers are Flowtraders, Jane Street & GHCO. |
| Authorised Participant | Authorised Participants, are organisations that are entitled to trade against the fund itself, these tend to be large organisations such as Goldman Sachs, Morgan Stanley or Credit Suisse. These organisations work with institutions and the market makers to ensure liquidity behind the ETF. |
| Domicility | The Domicile, explains where the fund is actually held, within Europe this tends to be done for tax reasons meaning that most funds are domiciled in Ireland or Luxembourg. |
| Prospectus | The prospectus is the legal document that describes the fund encompassing, investment Objectives, Risk factors, Expenses. These documents tend to be long and turgid in nature. |
| KIID | Key Investor Information Document, recognising the fact that the Prospectus was long and boring, the European Commission created a simplified document called the KIID with simplified information . |
| Factsheet | Whereas the KIID is a regulatory document whose structure is defined the factsheet is more of a marketing document whose structure is defined by the provider, again this tends to be a short document aimed at promoting the funds aims and where it can be traded. |
| Custodian | The custodian, is the participant who securely stores the assets of the ETF in the appropriate domicility, the custodian ensures the assets are used to benefit the ETF shareholders. |
| Accumulating | All cash that is received into the fund e.g. by dividends are reinvested into the fund, ensuring that all cash is accumulated. |
| Distributing | All cash that is received into the fund e.g. by dividends is accumulated for a period and then distributed to shareholders at defined intervals, normally two to four times a year, these distributions are known as ETF dividends. |
| Hedged | ETFs can be hedged into different currencies e.g. you can have a S&P 500 hedged into EUR, this isolates clients from the impact of currency fluctuations, this is done by the use of currency forwards, these can either reset on a daily or monthly basis. Some providers make the currency forwards explicit in the tracking basket as it is a core component of the pricing. |
| Leveraged / Short | Some ETFs provide multipliers on the performance both positive and negative. However, all of these products contain warnings as they are purely for professional investors as they do not replicate this performance over a long period as the performance resets daily. |
| Optimised basket | Due to the number of stocks in some indices, rather that purchasing the full basket (with associated transaction costs) the custodian merely purchases a representative subset and uses this to replicate the performance, these are known as optimised baskets. This can result in a larger tracking error but reduces transaction costs. |
| Full replication | ETFs that buy all constituents are known as full replication, this should reduce the tracking error. |
| Spread | Spread on the exchange is the measure between the bid and ask price. |
| UCITS | UCITS is a regulatory framework across Europe for the Undertaking for the Collective Investment in Transferable Securities, this is designed for funds aimed at retail investors.. |
| Tracking Error | Tracking Error is the divergence in the performance of the Benchmark Index and the ETF, this can be caused by fees, slippage in actual holdings or delta of actual holding. |
