ETF Glossary: Key Terms to Know

Ask price

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

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.

Discount/premium to NAV

When an ETF's price exceeds the total market value of its underlying holdings, the ETF is trading at a "premium." When an ETF's price is lower than the total market value of its underlying holdings, the ETF is trading at a "discount." Significant premiums or discounts with ETFs are rare.

Index or underlying index

A group of securities (stocks or bonds) maintained by an index provider (such as S&P) 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.

Index fund

An index fund is a portfolio of investments designed to mirror the performance of a specific market index. It may hold the same components and weightings as the index, or may track the index through derivative instruments or a sampling of the index holdings.

Liquidity

The extent to which an asset can be bought and sold quickly. For ETFs, liquidity is mostly based on the average daily volume of the underlying securities in its portfolio and ease of market access for those securities.

Limit order

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

Management expense ratio (MER)

MER, also known as the expense ratio, is the annual fee that all funds charge shareholders for holding the fund. Expressed as a percentage of assets under management (AUM), it captures the management fee, operating expenses and taxes incurred by a fund on an annual basis. Operating expenses can cover items such as fund valuation costs, audit and legal fees and costs related to prospectuses and annual reports. The MER doesn't include sales commissions you may pay, or the fund's trading costs. A fund's prospectus will offer more information.

Market order

A buy or sell order that's typically executed immediately at the best available price.

Net asset value (NAV) per unit

The gross assets of a fund less any liabilities, divided by the number of outstanding units.

Stop-limit sell order

A stop-limit sell order helps curb losses or protect gains by triggering a limit order for an ETF once it reaches a specified unit price (i.e. the stop price). Once the market hits this price, even if it is due to temporary market volatility, the ETF will be sold at the limit price or better.

Target maturity date bond ETF

This type of ETF has underlying bonds all expected to mature in a single calendar year.

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.

Transparency

The visibility level of securities holdings within a given portfolio or fund. ETF holdings are generally disclosed daily.