Glossary

Term
Definition
Authorized Participant

This term refers to large financial institutions, such as specialist firms and market makers, which are involved in the creation and redemption activity of ETF shares.

Basket

A group of several securities created for the purpose of simultaneous buying or selling.

Beta

A measure of an asset's sensitivity to an underlying index. Stocks with beta higher than 1.0 have been more volatile than the index; stocks with beta lower than 1.0 have been less volatile than the index.

Constituents

The components of a grouping. For example, the securities included in an equity index are considered the index's constituents.

Creation Units

Large blocks of tens of thousands of ETF shares which can be exchanged in-kind with baskets of the underlying securities when an ETF is initially established.

Day Order

An order that is valid only for the day it is entered. If the order is still outstanding when the market closes, it will be purged overnight.

Designated Broker

A person who is registered as a broker and must perform certain brokerage duties in relation to an ETF.

Discount to NAV

A mutual fund, closed end fund or ETF whose share price is lower than fund's net asset value (NAV). The occurrence of significant premiums or discounts with ETFs is rare, whereas with closed end funds it's common.

Efficient Market Theory

The Efficient Market Theory (EMT) dissuades investors from using fundamental research to find undervalued or mispriced securities. The central idea is that market prices already reflect the full knowledge of investors, which makes it impossible to outperform the market.

ETF Provider/ETF Sponsor/ETF Manufacturer

The company that establishes and administers an Exchange Traded Fund. It administers the ETF by dealing with the creation units and institutional investors when there are changes to the underlying index.

Factor

A signal, attribute, or any variable which correlates with past stock returns and is expected to be correlated with future stock returns. Factors exhibit relationships with stock returns that not only are stable and persistent over time but also have a basis for driving future returns.

Fundamental Indexing

Fundamental indexing uses a company's fundamentals such as sales, profits, book value, revenues and dividends to determine its weighting within an index. Some fundamental indexes use a multi-factor approach whereas others use one key factor.

Index

A group of securities chosen on criteria and maintained based on a set methodology. An index is used as a performance benchmark for a particular market. Examples are the S&P/TSX Composite Index and the S&P/TSX Venture Composite Index.

Index Provider

A company or organization that creates and administers an index

Leveraged ETFs

The main objective of leveraged ETFs is to deliver magnified performance of a particular stock, bond or commodity index. Most leveraged ETFs attempt to duplicate daily index returns by two or three times. Short leveraged ETFs aim for daily index returns that move in the opposite direction, but with magnified performance of two or three times.

Limit Order

An order to buy or sell stock at a specified price. The order can be executed only at the specified price or better. A limit order sets the maximum price the client is willing to pay as a buyer, and the minimum price they are willing to accept as a seller.

Liquidity

This refers to how easily securities can be bought or sold in the market. A security is liquid when there are enough units outstanding for large transactions to occur without a substantial change in price. Liquidity is one of the most important characteristics of a good market. Liquidity also refers to how easily investors can convert their securities into cash.

Underlying Index

The index that is being tracked by an ETF or index fund. For example the S&P/TSX 60 Index is the underlying index for the iShares CDN S&P/TSX 60 Index Fund (symbol XIU).

Weighting

A designated proportion given to each component of an index, portfolio or fund. The proportion illustrates the relative importance or influence on the whole (index, fund or portfolio). Usually a weighting is stated as a percentage of the whole (for example, the stock makes up 21% of the total index). The determination of the proportions can be based on various factors such as market capitalization, trading price, or a company fundamental. Weightings can change as the underlying factors change.