Glossary of ETF Terms

Annual Yield – The percentage of return or income expressed in terms of dividends or interest that an investment yields each year.

Ask Price – The lowest price a seller is willing to accept to sell a security.

Benchmark – An index that serves as a standard against which the performance of a fund or portfolio is measured. For example, a stock fund may be compared with the S&P 500 index to assess how it performs over time.

Bid Price – The highest price a buyer is willing to accept to purchase a security.

Bid/Ask Spread – The difference or spread between the bid and ask prices.

Core/Satellite Investing – An investment strategy based on using ETFs as the “core” of an investor’s portfolio in combination with other more specialized investment options, such as other mutual funds or individual stocks (the “satellites”).

Coupon – The periodic interest payment made to bondholders during the life of the bond.

Creation Unit – The smallest block of ETF units that can be bought or sold from the ETF at net asset value by the designated broker.

Current Yield – Amount of coupon income to be received on an annual basis, divided by the market price of the bond.

Duration – Measures the price sensitivity of a fixed income asset, or a portfolio, to a 1% change in interest rates, by factoring in a bond's yield, maturity, and any call or put features. The bigger the duration number, the greater the price volatility of the bond to changes in interest-rates.

Designated Broker – A registered dealer that has entered into an agreement with the ETF manager on behalf of one or more ETFs in which the broker agrees to be the primary dealer to facilitate trading in a security by standing ready to buy and/or sell units at a publically quoted price.

Ex-Dividend date – The date that determines who should receive the next distribution payment. A buyer transacting on or after the ex-date will NOT receive distribution payments.

Index Fund – A fund that tracks or invests in the securities of a particular index or benchmark. For example, an index fund may track the S&P/TSX Composite Index by purchasing proportional amounts of the securities that comprise the index.

Index or underlying Index – A group of securities (stocks or bonds) maintained by an index provider (such as S&P or DEX) used as a performance benchmark for a particular market (e.g. S&P/TSX 60 Index, which contains 60 of the largest companies by market capitalization traded on the TSX). The index level or current value of the index is tracked continuously during the trading day.

Ladder (Bond) Portfolio – A strategy for managing fixed-income investments, by which an investor builds a portfolio comprised of several bonds each with a successively longer term to maturity. The advantages of bond ladders include 1) decreased interest rate risk, through holding both short and long-term bonds, 2) decreased re-investment risk, because as one bond matures, the cash is re-invested at prevailing interest rates and 3) steady cash flows through regular bond maturities.

Limit Order – An order to buy or sell a set number of shares/units at a specified price or better.

Liquidity – The ability of the market to absorb a reasonable amount of buying or selling in a particular security at reasonable price changes. Exchange-traded funds offer two forms of liquidity:

  1. Market Supply and Demand: As with stocks, the natural trading of ETFs among individual investors and/or traders which takes place on the stock exchange during market hours
  2. Designated Brokers (DB): Designated Brokers can create or redeem units directly with the fund, allowing them to provide additional market liquidity in the particular security, as required.

Market Order – An order to buy or sell an investment immediately at the current market price.

Money Market – Short-term fixed income products that are sold at a discount and later mature at face value. In Canada, these include federal government treasury bills, short term Government of Canada bonds, commercial paper, bankers’ acceptances, and guaranteed investment certificates (GICs).

Net Asset Value (NAV) – The gross assets of a fund less any liabilities. Usually calculated at the end of every trading day.

Net Asset Value (NAV) Per Unit – The gross assets of a fund less and liabilities divided by the number of outstanding units.

Par Value – The stated maturity value of a security. A bond’s par value is the dollar amount on which interest is calculated and the amount paid to holders at maturity.

Par Value per Unit – The par value of all bonds held by an RBC Target Maturity Corporate Bond ETF divided by the number of units outstanding.

Securities Basket – A basket of securities, as defined by an ETF sponsor, that the Designated Broker can either deliver to, or accept from, the sponsor in exchange for units of the fund.

Tracking Error – Measures the performance of a fund against its benchmark index. The difference between the historical performance of the fund and its benchmark is called performance difference. Mathematically Tracking Error is typically expressed as the standard deviation of performance differences over time.

Weighted Average Coupon – The mean or average of the coupon rates of the underlying bonds in a portfolio.

Weighted Average Duration – The mean or average of the durations calculated on the underlying bonds in a portfolio.

Weighted Average Maturity – The mean or average maturity on the underlying bonds in a portfolio.

Yield – The measure of return on an investment, shown as a percentage. In the case of fixed income securities, yield is calculated by taking the annual interest payments plus the amortized difference between the current market value and the par value over the life of the security.

Yield Curve – A graph that shows the comparative yields of securities in a particular class. The yield curve is normally upward sloping, with longer term rates higher than short term rates.

Yield to Maturity – Conveys the total return investors will receive by holding the bond to maturity. The calculation encompasses two factors:

  1. The fixed coupon income
  2. The capital gain or loss representing the difference between the market price and the face value of the bond.


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