Glossary

A

Active fund
A fund that aims to provide above-average performance by using human judgement and/or quantitative tools to select and trade stocks and asset classes. Active fund managers try to outperform indices or meet specific total return targets. Index fund managers, by contrast, try to match the performance of indices as closely as possible.

Active manager risk
Alternate term: predictive tracking error

Also known as predicted tracking error, active manager risk expresses how much tracking error relative to abenchmark a portfolio manager may produce while attempting to add alpha over and above the benchmark. In this context, tracking error can be quantified as the standard deviation of a manager's alpha to a benchmark. If a manager's benchmark is the S&P 500, and the tracking error of his or her alpha to that benchmark is 5.5%, and assuming a normal distribution, then:

  • 2/3 of the time the alpha should fall within a range of +5.5% and -5.5%
  • 1/6 of the time positive alpha should be greater than +5.5%
  • 1/6 of the time negative alpha should be less than -5.5%

This signifies that the client will experience negative tracking error of -5.5% or more in one out of every six years. Although a client's tolerance for negative alpha in any year is an important consideration in determining a risk budget, their tolerance for this one-in-six-year negative event is especially important.

Active manager risk budget
A subjective, customised goal established to quantify the amount of active manager risk an investor is comfortable assuming. Clients with a low tolerance for active manager risk will tend to allocate more of their assets to index funds to achieve low tracking error. Clients who are less sensitive to tracking error tend to allocate 100% of their investments to active managers. Risk budgeting is a process that usually combines index and active funds to reach a middle ground. For example, by combining indexed and active components in a portfolio, a financial adviser may aim to meet a client's tolerance for tracking error risk while allowing potential for above-average returns from active managers seeking to outperform the market.

Alpha
An investment manager's return relative to the return of a benchmark.

Annual turnover
The percentage by value of stocks in a portfolio that are sold and replaced with new stocks each year. Index funds tend to have much lower turnover than active funds and are therefore likely to have fewer trading costs to pass on to investors and detract from performance.

Arbitrage
Profiting from differences in the prices quoted for a stock. Arbitrageurs simultaneously purchase and sell the same stock, usually on different exchanges or market places. In the case of iShares funds, market participants use arbitrage to make a profit by buying and selling iShares funds and their underlying stocks in the primary and secondary markets for iShares funds. This benefits all investors in the iShares secondary market - whether institutions or individuals - by helping to keep the market price of iShares funds close to the value of their underlying stocks.

Ask price, offer price
The lowest price sellers are willing to accept for a security.
Related terms: bid price, spread.

Asset allocation
The process of spreading an investment among a variety of asset classes such as stocks, bonds, property, and cash.

 


B

Basis point (bip)
A unit of measure, equal to 1/100th of 1%, or 0.01%

BBESTCSH
Bloomberg symbol for "Estimated Cash"

BBSHROUT
Bloomberg symbol for "Shares Outstanding"

BBTOTCSH
Bloomberg symbol for "Total Cash"

Benchmark index
A financial index against which the performance of a fund or investment strategy can be measured.

Beta
A measure of volatility showing how volatile stocks or funds are relative to their benchmark indices. A benchmark index has a fixed beta of 1. A stock or fund with a beta of more than 1 moves up and down more than the market, while the value of a stock or fund with a beta of less than 1 will fluctuate less than the market.

Bid price
The highest price that buyers are willing to pay for a security.
Related terms: offer price, spread.

Bond
Tradeable, long-term debt raised by a borrower who agrees to make regular interest payments, known as coupons, and to repay the initial sum borrowed at a specified time.

Buying on margin
Alternate term: margin

Borrowing money to buy securities in a brokerage account.
Investors should be aware that the use of derivatives and short positions may involve the loss of all the money you invested and you may have to pay more later.

 


C

Capital gain
A profit on the sale of assets.

Clean price
The price quoted for a bond excluding accrued interest.

Collective investment scheme
A fund that gives investors access to a diversified portfolio of investments. Some collective investment schemes specialise, for example by investing purely in equities issued by large companies in a particular country or market. Other collective investment schemes may provide access to a range of assets or markets. Each shareholder in a collective investment scheme participates in the gains or losses made by the fund. Many collective investment schemes are open-ended funds, and are therefore able to create and redeem shares as demand for shares increases or declines. iShares funds are examples of open-ended collective investment schemes that aim to reflect the returns of market indices.

Commission
The fee paid to a broker on each purchase or sale of a security. iShares products are dealt through brokers and commission is therefore payable on the purchase or sale of iShares products. Private investors who trade frequently or invest regularly should take this into account when deciding whether iShares products are an appropriate vehicle for their investment needs.

Contract for difference (CFD)
A financial instrument whereby an investor enters into a contract with a financial institution to receive or pay the difference between the value of an index on the day the contract is settled and the day it matures. In using CFDs investors risk losing more money than they originally invested.

Core building block
Part of the core holdings in a core-satellite portfolio. Core building blocks usually provide long-term exposure to an entire market or geographic region. They are therefore usually highly diversified and exhibit relatively low risk. For many investors, index funds provide the most efficient and inexpensive tools for combining core building blocks into a core portfolio. For example, an investor might use a variety of iShares products as building blocks to establish long-term, lower-risk core investments around which active investment strategies may be employed to boost performance.

Core-satellite portfolio
A portfolio with two main elements:

  • Core building blocks: these long-term, lower-risk holdings form the basis of the portfolio and outline the main asset allocation policy.
  • Satellite elements: smaller than the core elements, these are used to add additional returns to the portfolio through exposure to higher risk/return strategies or assets.

Core-satellite investing provides a framework in which asset allocation can be implemented with more purity and efficiency than portfolios allocating 100% of their assets to active management. The most popular form of core-satellite portfolio uses index funds to build the core positions. Actively managed satellite components are then added to give exposure to markets and investment managers that may provide higher returns.

Cost averaging, dollar cost averaging, pound cost averaging
Alternate term: dollar cost averaging

Investing a fixed amount on a regular basis in a particular asset, often through a well-diversified investment vehicle such as a collective investment scheme. By buying regularly and ignoring market prices, cost averaging investors aim to reduce the average cost of their investments by drip-feeding cash into the markets and thus lessening the risk of investing a large amount of cash at the wrong time. Cost averaging does not guarantee against losses in a portfolio.

Creation unit
A measure used in the iShares primary market, where iShares funds are created and redeemed by market participants. A creation unit is block of thousands of shares of an iShares fund and is the smallest block of shares that can normally be bought or sold by market participants from iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc, iShares VI plc, iShares VII plc, iShares (LUX) plc, iShares (CH) plc or iShares (CH) II plc. The size of creation units varies between iShares funds. Creation unit transactions take place in kind (by exchanging stocks), not cash, and at net asset value (NAV), not market price. Payment for creation unit orders is made by a transfer to the fund of a basket of securities equivalent to the component securities making up the benchmark index, together with cash reflecting accumulated dividends in the fund. Redemption of iShares is carried out by transferring creation units to the fund in exchange for a basket of stocks and some cash. Investors who are not market participants trade in the secondary market, where they are able to buy or sell iShares funds in any size lot at the market price through a broker.

CUSIP
A nine-character number that uniquely identifies a particular security. CUSIP is an acronym for the Committee on Uniform Securities and Identification Procedures, the standards body which created and maintains the classification system.

 


D

Dirty price
A bond price that includes accrued interest.

Discount/premium to net asset value (NAV)
An ETF that trades in the secondary market at a price less than its net asset value (NAV) is said to trade at a discount to its NAV. An ETF that trades in the secondary market at a price that is higher than its NAV is said to trade at a premium to its NAV. iShares ETFs may trade above or below their NAVs. However, iShares ETFs' open-ended structure and the mechanism used to create and redeem iShares ETFs are designed to continually move the market price of iShares funds towards their NAVs. iShares funds are therefore highly unlikely to experience the prolonged periods of discount or premium to NAV experienced by many closed-ended funds. BlackRock cannot, however, guarantee that iShares funds will trade within specific ranges of their NAVs.

Diversification
Spreading risk by investing in a variety of asset classes, sectors or geographical regions. The aim of diversification is to increase the likelihood that losses from one investment will be offset by gains from another investment and thus reduce the risk that all the investments in a portfolio will decline in value at the same time.

Dividend yield
A company's declared dividend per share as a percentage of its current share price.

 


E

Earnings Per Share (EPS)
An indication of a company's profitability. The portion of a company's profit allocated to each outstanding share.
Calculated as:
Net Income - Dividends on Preferred Stock
Average outstanding shares

Effective duration
A measure of a bond's sensitivity to interest rate changes. Like modified duration, effective duration approximates the change in a bond's price given a change in yield. Effective duration deals with embedded options within bonds, whereas modified duration is used only when all bonds under consideration are option free.

Exchange Traded Commodities (ETCs)
iShares physically-backed Exchange Traded Commodities (iShares Physical ETCs) are series of secured metal-linked debt securities that trade on one or more regulated exchanges and offer investors easily accessible, liquid and transparent exposure to precious metals. iShares Physical ETCs provide investors with secured exposure to the performance of individual precious metals without the need to take physical delivery or trade commodity futures contracts. The securities are issued in the form of debt securities that are fully backed by physical holdings of the relevant metal in secured vaults. The securities of iShares Physical ETCs can be traded throughout the day and are bought and sold like ordinary stocks through brokers or financial advisers during normal trading hours.
iShares Physical ETCs are exchange traded commodities and are neither funds, ETFs or collective investment schemes. iShares Physical ETCs are series of secured metal-linked debt securities issued by iShares Physical Metals plc. The sole purpose of iShares Physical Metals plc is to store the relevant physical metals and to issue debt securities that are backed by such physical holdings.

Exchange Traded Funds (ETFs)
iShares funds are one example of the growing number of exchange traded funds available to investors since 1993. Exchange traded funds are designed to track indices. They are not collective investment schemes in the traditional sense; rather, they are hybrid instruments combining aspects of equities and collective investment schemes to offer many of the benefits of both. Exchange traded funds are open-ended funds with no definedmaturity that are listed on many stock exchanges around the world. Unlike traditional collective investment schemes, they can be traded throughout the day. These instruments are increasingly popular among institutional and retail investors for a wide variety of applications in building portfolios, implementing long and short investment strategies, controlling costs and risk and pursuing trading strategies.

 


F

Flat yield
Alternate term: running yield

A measure of short-term returns calculated as a bond's coupon divided by its clean price. It explicitly ignores capital gains or losses on a bond and is therefore not used to calculate total return.

Free-float
The number of a company's shares available for purchase by the public or institutional investors on the open market.

Front load
Alternate term: initial charge

A fee that a fund may charge on entry, i.e. when an investor purchases holdings in the fund.

Fungible
Interchangeable. The term is often used to apply to financial instruments that are identical in specifications, such as iShares funds and their underlying constituents. Other examples of highly fungible investment instruments are options and futures contracts, which are highly standardised arrangements. On the other hand, forwards and swaps are not fungible, because they are customised arrangements. Instruments that are highly fungible tend to be very liquid, and so transaction costs tend to be low.

Futures
Financial contracts governing the sale of financial instruments (such as a market index) or physical commodities (such as oil) for future delivery. Participants in futures contracts take positions on what they believe the future value of a financial instrument or commodity will be. Futures are widely used by institutional investors, including collective investment schemes, to in a wide variety of applications, such as controlling risk by hedging or gaining exposure to asset classes.

 


G

No glossary available for G

 


H

No glossary available for H

 


I

No glossary available for I

 


J

No glossary available for J

 


K

No glossary available for K

 


L

No glossary available for L

 


M

Macaulay duration
The weighted-average term to maturity of a bond's cash flows. The weighting is based on the present value of each cash flow divided by price.

Market capitalisation
The total value of a company. Calculated as the total number of shares multiplied by the current share price.

Market depth
Deep order books allow investors to buy in size without concern. As long as the client order is equal to, or less than, the order quoted on exchange, they can be assured that the trade will be filled in full at the price quoted. Therefore the deeper the order book (the more units that can be purchased/sold) the more clients know they can achieve the on-screen price for a large size trade.

Market order
A trading instruction requiring a broker to buy or sell immediately and accept the price that the market provides.

Market participant, (or authorised participant)
Alternate term: authorised participant

Large financial institutions that create and redeem iShares directly with funds in creation unit sizes - typically 50,000 to 200,000 shares. Market participants create iShares by delivering the underlying stock in-kind (in-specie) and a small cash amount in return for iShares creation units. To redeem creation units, market participants deliver iShares funds in exchange for the underlying basket of stock plus a small amount of cash.

Market price
The price of an asset determined by market forces of supply and demand. While open-ended products are usually bought and sold at net asset value (NAV), the market price of an iShares product may be different from its NAV. However, the process used to create and redeem iShares products is designed to ensure that iShares products will usually trade at market prices that are close to their NAVs.

Market return
An exchange traded fund's (ETF's) total return, calculated using its market price at the beginning and end of the holding period. This may be different from the ETF's net asset value (NAV) return. The return earned by investors in the secondary market is the market return. The return earned by market participants trading in creation units in the primary market is the NAV return.

Maturity

  1. The length of time until the principal amount of a bond must be repaid.
  2. The end of the life of a security.

Median market capitalisation
The market value (capitalisation) of the middle stocks in a portfolio when ranked by capitalisation.

MSCI indices
The Morgan Stanley Capital International (MSCI) indices are constructed in a consistent manner across all countries, encompassing more than 20 developed markets and more than 25 emerging markets. This consistent approach to index construction ensures the proper representation of the countries' underlying industry distribution market capitalisation and allows investors to make accurate comparisons of equity performance across markets, regions and sectors.

Multi-dealer model
An ETF model which allows multiple market participants to create new and redeem existing ETF units in the primary market. Depending on the fund exposure there can be as many as 30 authorised participants (APs) supporting primary market activity. This ensures competitiveness and pricing efficiency for the creation and redemption process of iShares ETFs.

In the secondary market, trading model for iShares ETFs is based on a multi-dealer platform and consists of up to 52 investment banks, regional brokers, liquidity providers and market makers. The aim is to encourage market makers to participate and create both tight spreads and market depth. From a client perspective, bid/ask spreads are an important component of the total cost of ownership when trading ETFs. The higher the number of market makers, typically the more competitive the pricing and this can lead to tight on exchange ETF spreads.

 


N

No glossary available for N

 


O

No glossary available for O

 


P

No glossary available for P

 


Q

No glossary available for Q

 


R

No glossary available for R

 


S

Secondary market
The trading venues for buyers and sellers of ETF shares. This is either performed on-exchange or 'over-the-counter'.
The multi-dealer model encourages more market makers to trade iShares.
More market makers translates to tighter spreads, deeper order book and an improved trading execution experience as competitive forces require market makers to provide the best service possible or lose business to their rivals.
Related terms: Primary market

Sell short
To sell assets that you do not own. Short sellers aim to make a profit by selling assets they do not own in the expectation that the assets will fall in value and therefore may be bought at a cheaper price to cover settlement of the trade.
Investors should be aware that the use of derivatives and short positions may involve the loss of all the money you invested and you may have to pay more later.

Sharpe ratio
A risk-adjusted measurement of performance. A Sharpe ratio is calculated by dividing the excess return of a fund over the risk-free rate of return (such as Bunds, Treasury bonds or Gilts) by its standard deviation. The higher the Sharpe ratio, the better a fund's risk-adjusted performance.

Spread, bid-offer spread, bid-ask spread or price spread
Alternate term: bid-offer spread

The difference between the bid price and offer price.
Consider the following example where an investor wishes to buy 1,000 units of an ETF. The investor looks at the order book to see how deep the market is and the quote offered is 10,000 units. The investor knows the order will be filled.
The investor looks at the mid and/or last price to see the approximate trading price of the ETF. This price is currently €10.00. The Client then looks at the spread, where the quotes are €9.50 - €10.50 (Sell - Buy) and buys at the offered price of €10.50.

Cost of purchase (ignoring commissions) = 1,000 x €10.50 = €10,500
However, if the spread had been tighter, one can see the advantage to the investor.
If in the above example, the investor wishes to purchase 1,000 units of the same ETF and instead notices the spread is €9.99 - €10.01 (Sell - Buy), and buys at the offered price of €10.01. In this scenario:

Cost of purchase (ignoring commissions) = 1,000 x €10.01 = €10,010.
The benefit of the tighter spread is clear for the investor, resulting in a saving of €490 (€10,500 - €10,010 = €490).

Standard deviation
A measure of fund volatility, expressed as a percentage. Standard deviation measures the average variability of a fund's returns over a time period. More stable investments such as money market funds have standard deviations near to zero, while high-risk equity funds usually exhibit higher standard deviations. A standard deviation of 10 indicates that a fund will be within 10% of its mean (average) price for approximately 68% of the time.

Stop order
A trading instruction telling a broker when to trade. Once a market has traded to the price level of the stop, this becomes a market order and might be executed at better or worse than the stop level. Stops are commonly used as a risk management mechanism to close positions in order to limit losses.

Style drift
When a fund's investment portfolio moves away from its stated investment objective, for example by investing in assets outside of its target asset class.

Swap
A swap is an agreement between two parties (one usually being an investment bank) to swap one stream of payments for another. Swaps are individually tailored contracts (sometimes referred to as 'OTC' or 'over the counter') and can be based on any terms agreed by the two parties.

Swaps based upon interest rates and currencies have existed for over 30 years. An ever-growing list of instruments is now being included such as inflation, credit, equity market returns and commodities.

Swaps generally involve an exchange of a fixed set of cashflows known in advance for a variable ('floating') set of cashflows that depends on the future path of a variable, such as the performance of a stock market.

 


T

Total expense ratio (TER)
Alternate term: expense ratio

The expenses paid by a product to cover management fees, the trustee's fee, license fees and operational costs such as trading and custody. TER is expressed as a percentage of a product's assets. It does not include the commissions paid to brokers on the purchase and sale of iShares products.

Tracker fund, trackers

  1. A collective investment scheme that seeks to provide the same total return as an underlying index by investing in the companies listed in the index. The term is usually applied to traditional forms of index funds, such as those structured as OEICs, SICAVs or unit trusts. In Europe, "tracker" may also refer to exchange traded funds such as iShares funds.
  2. Any form of synthetic financial instrument (derivative) designed to track a market index or subset of it. See also Index Fund, Indexing, Index Tracking and Exchange Traded Funds.

Tracking error

The amount by which a fund's performance deviates from the performance of its benchmark index. Index funds, which aim to match the performance of their benchmark indices, usually have low tracking error. However, some degree of tracking error is to be expected in index funds, including iShares funds, as a result of management and trading costs and fees. See also Active Manager Risk (Predicted Tracking Error).

 


U

No glossary available for U

 


V

No glossary available for V

 


W

Weighted Average Coupon
The sum of a bond's coupons weighted by market value.

Weighted Average Maturity
Sum of a bond's maturities weighted by market value.

WSJ name
How the iShares fund is listed in the Wall Street Journal.

 


X

No glossary available for X

 


Y

Yield to Maturity
Yield that would be realised on a bond or other fixed income security if the bond were to be held to its maturity date. If a bond is selling at a discount, the yield to maturity will be greater than the current yield. If a bond is selling at a premium, the yield to maturity will be less than the current yield.

 


Z

No glossary available for Z