ETF Investment Glossary

After-tax Returns
After-tax returns are based on the historical highest individual federal marginal income tax rates and do not reflect state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may be higher or lower. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as IRAs or 401(k) plans.

Alpha
The manager’s return relative to the return of a benchmark.

Asset Allocation
The process of spreading an investment among various asset classes such as stocks, bonds, and cash equivalents with the goal of reducing portfolio volatility and increasing long term returns.

Barclays Global Investors (BGI)
Barclays Global Investors is the creator of iShares® and is a wholly owned subsidiary of Barclays Bank PLC. BGI is one of the world’s largest investment managers and created the world’s first index strategy more than thirty years ago.

Basis Point
A unit of measure, equal to 1/100th of 1%, or .01%.  100 basis points = 1%

Capitalization-Weighted Index
This an index that gives each company a weight in proportion to the total market value of that company’s outstanding shares. The vast majority of indices today are constructed in this manner.

Cohen & Steers 
Founded in 1986, Cohen & Steers was the first American company formed exclusively to focus on real estate securities. The firm was founded with the belief that a well-managed portfolio of publicly traded real estate investment trusts (REITs) and other real estate companies can offer investors the beneficial investment characteristics of direct real estate ownership.

Cohen & Steers Realty Majors Index
The Cohen & Steers Realty Majors Index consists of selected Real Estate Investment Trusts (REITs). The objective of the index is to represent relatively large and liquid REITs that may benefit from future consolidation and securitization of the U.S. real estate industry. The index is weighted according to the total market value of each REIT’s outstanding shares and is adjusted quarterly so that no REIT represents more than 8% of the index.

Core/Satellite Hypothetical Tool 
The Core/Satellite tool allows you to hypothetically illustrate the tradeoff between alpha and tracking error to a benchmark index. Intuitively, active managers can potentially achieve higher alpha with higher levels of tracking error since higher tracking errors reflect the fact that the manager’s portfolio is increasingly different than the benchmark. However, client tolerance for tracking error varies based on their individual tolerance for under performing a benchmark over the near- or long-term. The Core/Satellite tool serves as a calculator for illustrating a hypothetical portfolio that blends indexes with active managers to achieve a lower tracking error than that produced by an allocation entirely to the active manager. There are three key inputs for the Core/Satellite tool: Alpha, Tracking Error and Active Manager Risk Budget.

Exchange-Traded Funds 
Exchange-traded funds (ETFs) are not mutual funds in the traditional sense; rather, they are hybrid instruments combining aspects of common stocks and mutual funds and offering many of the benefits of both. Created in 1993, these instruments have been widely used by institutional investors (some 75% of the universe of ETF assets, now more than $20 billion, is held by institutions) and retail investors. ETFs are actively traded, too, with an average volume of 20 million shares changing hands every trading day (Source: Barclays Global Investors research as of 9/30/99.) While iShares are the newest example, a number of ETFs already exist:

Free-Float 
Free-float refers to the amount of a company’s shares outstanding that are available for purchase on the open market at any point in time

Growth-Oriented Stocks
Stocks of companies that have shown faster-than-average gains in earnings over several years and are expected to continue to show high levels of profit growth. Typically riskier than average stocks, they exhibit higher price/earnings ratios and often make little or no dividend payments to shareholders.

Index
An index is a composite of a group of stocks and is used as a barometer of a market and as a benchmark for investors. Today, there are thousands of indices and some of the indices that iShares track are Russell, S&P, MSCI, Dow Jones and Lehman Brothers.

Index-Tracking Shares
Index-tracking shares are not mutual funds in the traditional sense; rather, they are hybrid instruments combining aspects of common stocks and mutual funds and offering many the benefits of both. 

Internal Rate of Return (IRR)
Internal Rate of Return (IRR) is the discount rate at which the present value of the future cash flows of an investment equal the cost of the investment. It is found by a process of trial and error; when the net present values of cash outflows (the cost of the investment) and cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR.

Large-Cap U.S. Companies 
Generally speaking, companies with market capitalization greater than $10 billion.

MSCI Indexes
The Morgan Stanley Capital International (MSCI) indexes are constructed in a consistent manner across all countries, encompassing a total of 23 developed markets and 28 emerging markets. This consistent approach to index construction ensures the proper representation of the countries’ underlying industry distribution market capitalization, and allows investors to accurately compare equity performance across markets, regions, and sectors.

Mid-Cap U.S. Companies 
Generally speaking, companies with market capitalization between $1.0 billion and $10 billion.

Nasdaq Biotechnology Index 
The Nasdaq Biotechnology Index contains companies engaged in using biomedical research for the discovery or development of new treatments and cures for human disease. The index is one of eight sub-indexes of the Nasdaq Composite Index, which measures all common stocks listed on The Nasdaq Stock Market.

The Nasdaq Stock Market
The Nasdaq Stock Market, which debuted in 1971 as the world’s first electronic stock market, is the fastest growing stock market in the United States. Nasdaq trades more shares per day and has a greater dollar volume of trades than any other U.S. equities market.

Post-Liquidation
Return after taxes on distributions. Assumes fund shares have not been sold.

Pre-Liquidation
Return after taxes on distributions. Assumes fund shares have not been sold.

Redeem
To exchange fund shares for their present value in either cash or “in-kind” securities.

Russell 1000 Index  
This index measures the performance of the 1,000 largest companies in the Russell 3000 Index, representing approximately 92% of the total market capitalization of the Russell 3000 Index. This index also contains about 800 companies that might be considered Mid Cap with market caps between $1.0 billion and $10 billion.

Russell 2000 Index  
This index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, representing approximately 8% of the total market capitalization of the Russell 3000 Index. The market cap of these companies range from about $100 million to $1.2 billion.

Russell 3000 Index
This index measures the performance of 3,000 publicly held U.S. companies based on total market capitalization, which represents approximately 98% of tenantable U.S. market.

S&P 500 Index, S&P 500
Widely regarded as the standard for measuring large-cap U.S. stock market performance, this popular index includes a representative sample of leading companies in leading industries. The S&P 500 is used by 97% of U.S. money managers and pension plan sponsors. More than $750 billion is indexed to the S&P 500.

S&P MidCap 400 Index, S&P 400
Measuring the performance of the mid-size company segment of the U.S. market, this index is used by over 95% of U.S. managers and pension plan sponsors. More than $25 billion is indexed to the S&P MidCap 400.

S&P/Barra Growth and Value Indexes
Companies in each U.S. index are split into two groups based on price-to-book ratio to create growth and value indexes. The value index contains companies with lower price-to-book ratios, while the growth index contains those with higher ratios.

Small-Cap U.S. Companies
Generally speaking, companies with market capitalization less than $1.2 billion.

Tracking Error
Tracking error in terms of an active manager’s return to a benchmark is often called Active Manager Risk, and expresses how much tracking error a manager of a portfolio risks while attempting to add alpha over and above an investor’s benchmark. In this context, tracking error can be quantified as the standard deviation of a manager's alpha to a benchmark.

Value-Oriented Stocks  
Stocks of corporations that are “cheap” by traditional yardsticks in comparison to their price/earnings ratio, price/book ratio, assets, cash flow and yield.