When you first start to investigate the world of ETFs, there are a lot of acronyms to contend with: ETN, MSCI, SPDR, AP, NAV and of course ETF are just a few.
So in this article we define the ETF acronyms that you’re most likely to come across.
AAA. This is a credit rating for prime bonds. If a bond is AAA, it means that credit rating agencies think a default is extremely unlikely. The different credit rating agencies use different categories for less secure debt. But the general principle is that the more ‘Bs’ or ‘Cs’ in the rating, the less secure are the bonds.
AMC: Annual Management Charge. A measure of the cost of investing in a fund. It’s normally applied as a percentage of the fund. So if you invested £1000 in an ETF with a 0.5% AMC, you’d expect to pay £5 a year to the ETF provider – assuming the value of your investment didn’t change at all. However, there will be some hidden costs on top of that £5 figure, and fund management firms find it relatively easy to massage the AMC. So it’s probably better to focus on the OCF or TER which include more costs.
AP: Authorised Participant. Authorised participants are a crucial part of the ETF creation and redemption process. APs are normally market makers or investment banks.
An AP signs up to support a particular ETF and it can then approach the ETF with assets that reflect the ETF’s composition. The AP can then demand shares in the ETF in exchange for those assets. It can also hand in shares in the ETF in exchange for underlying assets. If the share price of an ETF moves out of line with the value of the underlying assets, the AP can make money via arbitrage. That arbitrage process means an ETF’s share price is normally very close to the Net Asset Value (NAV).
CAC 40. The main stock market index in France
CU: Creation unit. A unit is the minimum amount of shares that an Authorised Participant can use in the creation or redemption process. Creation units can vary in size depending on the ETF, but most are between 25,000 and 600,000 ETF shares each.
DAX. Germany’s main stock market index.
DJIA or ‘Dow’. The Dow Jones Industrial Average. Traditionally this was the flagship US flagship stock market index. It only comprises 30 large US companies and the weightings don’t reflect market caps, just share prices.
ETC: Exchange traded commodity. Exchange Traded Commodities are debt securities that pay no interest. They are designed to give exposure to an individual commodity or a basket of commodities. These products aren’t UCITS regulated unlike ETFs. Some ETCs are physical and own the underlying commodities, some are synthetic and use futures contracts. For some commodities, such as grain, synthetic is the only practical approach.
ETCs are debt securities whereas ETFs are funds. That said, ETCs are fully collateralised which means there is no counterparty risk. If the bank that issued the ETC goes bust, you’ll still get your money as there is collateral.
ETC can also stand for exchange traded currency. These are also debt securities but give you exposure to foreign currencies rather than commodities. They’re also not eligible for UCITS regulation.
ETF: Exchange traded fund. These are investment funds that invest in assets such as equities or bonds. These funds are traded on stock exchanges as single entities and their share prices normally change repeatedly during the day. ETFs are open-ended which means that fresh ETF shares can be created to meet demand.
The majority of ETFs are now physical which means the ETF invests in the actual underlying assets of the fund, so that could be shares in an index. Some ETFs are synthetic which means they aim to mirror the performance of a particular index or asset using swaps.
ETN: exchange traded note. These are also debt notes. They can be linked to a range of different assets or indices and are listed on the stock exchange. They’re issued by a single bank. The underwriting bank agrees to pay the return of the index minus fees. Some ETNs are collateralised, some aren’t. ETNs aren’t UCITS regulated.
ETP: exchange traded products. This is the umbrella term that covers ETC, ETF and ETN.
FTSE 100 index : the hundred largest shares trading on the London Stock Exchange. There are several large ETFs that track its performance. It’s the UK’s flagship stock market index and is weighted towards pharmaceuticals, banks, resources and telecoms.
FTSE Russell: A large index provider. Its best known indices include the FTSE 100 in the UK and the Russell 2000 which is the main small cap index in the US.
IOPV: Indicative optimised portfolio value. This is a real time estimate of the value of an ETF’s underlying assets during the trading day.
LMM: Lead market maker. LMMs must make consistently offer buy/sell quotes in any ETF for which they are the LMM.
LSE: The London Stock Exchange
MSCI: One of the largest index providers.
Nasdaq: the second largest stock exchange in the world. Like the NYSE, it’s also based in New York. It has a reputation for listing technology companies.
NAV: Net asset value: The value of the underlying assets in an ETF or fund, divided by the number of shares in the fund.
Nikkei 225: the best known Japanese stock market index but perhaps not the most useful as it’s calculated on the basis of share prices rather than market caps.
NYSE: New York Stock Exchange.
OCF: Ongoing charges figure. A measure of the cost of investing in a fund or ETF. It’s more comprehensive than the AMC and slightly more comprehensive than the TER.
QQQ; the powershares QQQ ETF tracks the Nasdaq 100 and is one of the best known ETFs worldwide. It’s listed in the US and was formerly known as the QQQ or the NASDAQ- 100 Index Tracking Stock.
S&P 500 index: this index comprises five hundred of the largest companies listed on the US stock market. These include Amazon, Apple, Facebook and Exxon Mobil. The weightings of companies in the index are based on market caps. Also known as the ‘S &P’
S&P GSCI: A broad index of commodity futures. It used to be known as the Goldman Sachs Commodity Index, but S&P bought the index from Goldman Sachs in 2007.
S&P: A major index provider, operating indices around the world, on top of the S&P 500.
SPDR: see SSGA.
SPY or SPDR S&P 500 ETF: the world’s largest ETF. It’s listed in the US and tracks the S&P. It has more than $250 billion under management.
SSGA: State Street Global Advisers. One of the biggest ETF providers in the world, along with Vanguard and iShares. State Street’s ETFs are known as SPDR ETFs or ‘Spiders/Spyders.’
TER: Total Expense Ratio. a measure of the cost of investing in a particular fund, which might be an ETF. The TER is more comprehensive measure than the AMC, but the OCF covers a couple of extra costs beyond the TER.
Topix: Tokyo Price Index. This index comprises around 1700 of the largest listed companies in Japan. It’s calculated on the basis of market cap.
UCITS: Undertaking for Collective Investments in Transferable Securities. A regulatory framework for funds, including ETFs, that applies across Europe.