Glossary of Terms
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10-year treasury note – A debt obligation issued by the U.S. government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
12 Month Distribution Yield – Represents the annualized yield based on the last income distribution.
30-Day Median Bid-Ask Spread – Median bid-ask spread, expressed as a percentage rounded to the nearest hundredth, computed by: (a) identifying the ETF’s national best bid and national best offer as of the end of each 10 second interval during each trading day of the last 30 calendar days; (b) dividing the difference between each such bid and offer by the midpoint of the national best bid and national best offer; and (c) identifying the median of those values.
30-Day SEC Yield – Standard yield calculation developed by the U.S. Securities and Exchange Commission (SEC) that allows for fairer comparisons of bond funds. It is based on the most-recent 30-day period covered by the fund’s filings with the SEC. The yield figure reflects the fund’s dividends and interest earned during the period after the deduction of the fund’s expenses. It is also referred to as the “standardized yield.”
A
Agency – Mortgage securities whose principal and interest are guaranteed by a U.S. government agency such as Fannie Mae (FNMA) or Freddie Mac (FHLMC).
Alpha – Term used in investing to describe a strategy’s ability to beat the market. Often referred to as “excess return” or “abnormal rate of return,” which refers to the idea that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole.
Asset-Backed Securities (ABS) – Investment securities, such as bonds or notes, that are collateralized by a pool of assets, such as loans, leases, credit card debt, royalties or receivables.
Average Price – Measure of the weighted average price paid for a group of securities calculated by taking the prices and dividing by the number of securities and does not include cash. Average price should not be confused with net asset value (NAV).
B
Backwardation – When the current price of an underlying asset is higher than prices trading in the futures market. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the coming months through the futures market. Traders use backwardation to make a profit by selling short at the current price and buying at the lower futures price.
Basis Points (BPS) – Basis points (or basis point (bp)) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% or 0.0001, and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as: 1% change = 100 basis points; 0.01% = 1 basis point.
Below Investment Grade/Non-Investment Grade – Term indicating a security is rated below investment grade (IG). These securities are seen as having higher default risk or being prone to other adverse credit events. They typically pay higher yields than higher-quality bonds in order to make them attractive. They are less likely than IG bonds to pay back 100 cents on the dollar.
Beta – Measure of the volatility (or systematic risk) of a security or portfolio compared to the market as a whole. A stock’s beta is determined by analyzing how much its return fluctuates in relation to the overall market return.
Bid/Ask Spread – The amount by which the ask price exceeds the bid price for an asset in the market. The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept.
Bid Wanted in Competition (BWIC) – Formal request for bids on a package of securities that is submitted by an institutional investor to a number of securities dealers. The dealers are being invited to submit bids on the listed securities.
Bond Ratings – Grades given to bonds that indicate their credit quality as determined by a private independent rating service such as Standard and Poor’s or Moody’s. The firm evaluates a bond issuer’s financial strength, or its ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from AAA, which is the highest grade, to D, which is the lowest grade. In limited situations when the rating agency has not issued a formal rating, the rating agency will classify the security as “not rated.”
Book Value – Equal to the cost of carrying an asset on a company’s balance sheet, and firms calculate it netting the asset against its accumulated depreciation. As a result, book value can also be thought of as the net asset value (NAV) of a company, calculated as its total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an investment, book value might be net or gross of expenses such as trading costs, sales taxes, service charges and so on.
C
Capitalization-Weighted Index (or Cap-Weighted Index) – Is an index construction methodology where individual components are weighted according to their relative total market capitalization.
Cash – Refers, along with “cash equivalents”, to the line item on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately. Cash equivalents include bank accounts and marketable securities, which are debt securities with maturities of less than 90 days. Cash equivalents often do not include equity or stock holdings because they can fluctuate in value.
Cash Flow – Net amount of cash and cash equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows.
Closing Price – The final market price at which the fund traded at the end of the trading day. The closing price is considered the most accurate valuation of a security until trading resumes on the next trading day.
CME Term 3 Month Secured Overnight Financing Rate (SOFR) – Metric compiled by CME Group to provide a forward-looking measurement of three-month SOFR rates based on market expectations implied from leading derivatives markets. SOFR is a benchmark interest rate for U.S. dollar-denominated derivatives and loans that is replacing the London Interbank Offered Rate (LIBOR).
Commercial Mortgage-Backed Securities (CMBS) – Securitized loans made on commercial rather than residential properties.
Commodity – A basic good used in commerce that is interchangeable with other goods of the same type. Examples include oil, grain, and livestock.
Compound Annual Growth Rate (CAGR) – Rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.
Conduit Bond – Type of municipal bond sold by a governmental entity for the purpose of making proceeds available to a private entity usually in furtherance of a public purpose. An example would be bonds in connection with nonprofit hospitals or affordable housing.
Contango – Situation where the futures price of a commodity is higher than the spot price. In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration. Advanced traders can use arbitrage and other strategies to profit from contango.
Corporate bond – Debt issued by a company in order for it to raise capital. Buying a corporate bond is effectively lending money to the company in return for a series of interest payments.
Correlation – A statistical measurement of the relationship between two variables. Possible correlations range from +1 to -1. A zero correlation indicates no relationship between the variables; -1 indicates a perfect negative correlation; +1 indicates a perfect positive correlation.
Coupon – A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value, and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a year divided by the face value of the bond in question).
Credit Quality – Determined from the highest available credit rating from any nationally recognized statistical rating organization (NRSRO, generally S&P, Moody’s, or Fitch). The rating organization evaluates a bond issuer’s financial strength, meaning its ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from “AAA,” the highest grade, to “D,” the lowest grade. In situations where the rating organization has not issued a formal rating on a security, the security will be classified as “nonrated.”
Credit Rating – Refers to a quantified assessment of a borrower’s creditworthiness in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money: an individual, a corporation, a state or provincial authority, or a sovereign government.
D
Debt-to-GDP Ratio – Metric comparing a country’s public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
Delta – Ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.
Depreciation – Reduction in the value of an asset with the passage of time.
Developed market – A country that is most developed in terms of its economy and capital markets.
Dividend Yield – Shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.
Duration – Measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
E
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) – Measure of a company’s overall financial performance that is used as an alternative to net income in some circumstances.
Earnings Per Share – Calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
Emerging market – A country that is in the process of becoming a developed economy (see developed market above).
Equity yield premium – The difference between the valuation of treasury bonds and the valuation of the broad U.S. stock market.
Exchange-Traded Fund (ETF) – Type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.
F
Fannie Mae (FNMA) – The Federal National Mortgage Association (Fannie Mae) is a government-sponsored enterprise (GSE) chartered by the U.S. Congress in 1938 during the Depression to stimulate home ownership and provide liquidity to the mortgage market. Its purpose is to help moderate- to low-income borrowers obtain financing for a home.
Federal Funds Rate – Target interest rate, set by the Federal Reserve (or Fed) at its Federal Open Market Committee (FOMC) meetings, at which commercial banks borrow and lend their excess reserves to each other overnight. The Fed sets a target federal funds rate eight times a year, based on prevailing economic conditions.
Foreign Exchange (FX) – Foreign exchange (forex or FX) is the trading of one currency for another. For example, one can swap the U.S. dollar for the euro. Foreign exchange transactions can take place on the foreign exchange market, also known as the forex market. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).
Forward Price-to-Earnings (P/E) Ratio – The forward P/E ratio divides the current share price of a company by estimated future (“forward”) earnings per share (EPS). The straight P/E ratio (see below) measures current share price relative to current EPS.
Freddie Mac (FHLMC) – The Federal Home Loan Mortgage Corp. (Freddie Mac) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by the U.S. Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle-income Americans. Freddie Mac, purchases, guarantees and securitizes mortgages to form mortgage-backed securities (MBS).
Futures – Refers to a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
G
GFC – Global Financial Crisis.
Ginnie Mae (GNMA) – The Government National Mortgage Association (Ginnie Mae) is a U.S. federal government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBS) issued by approved lenders. Ginnie Mae’s guarantee allows mortgage lenders to obtain a better price for MBS in the capital markets.
Global Industry Classification Standard (GICS) – Hierarchical industry classification system, created by Morgan Stanley Capital International and S&P Dow Jones Indices in 1999, comprising four tiers going from broadest to narrowest to classify companies by industry: sectors, industry groups, industries, and subindustries. The 11 GICS sectors are: communication services, consumer discretionary, consumer staples, energy, financials, healthcare, industrials, information technology, materials, real estate, and utilities.
Gross Domestic Product (GDP) – Market value of all final goods and services produced within a country in a given period. GDP is considered an indicator of a country’s standard of living.
Gross Output (GO) – The measure of total economic activity in the production of new goods and services in an accounting period.
Growth Stock – Any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term. When investors invest in growth stocks, they anticipate that they will earn money through capital gains when they eventually sell their shares in the future.
H
Hedge funds – Financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors. Generally invest in a diverse range of markets and securities, using a wide variety of techniques and strategies, all intended to reduce risk while focusing on absolute rather than relative returns.
High Yield (HY) – Bonds that pay higher interest rates because they have lower credit ratings than investment grade (IG) bonds. HY bonds are more likely to default, so they must pay a higher yield than IG bonds to compensate investors.
I
Investment Grade (IG) – Rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bonds below this designation are considered to have a high risk of default and are commonly referred to as high yield (HY) or “junk bonds.” The higher the bond rating the more likely the bond will return 100 cents on the U.S. dollar.
J
K
L
Leverage – Investment strategy of using borrowed money – specifically, the use of various financial instruments or borrowed capital – to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.
Leverage Ratio – Any one of several financial measurements that look at how much of a company’s capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations.
London Interbank Offered Rate (LIBOR) – Indicative average interest rate at which a selection of banks, known as the “panel banks,” are prepared to lend one another unsecured funds on the London money market.
London Interbank Offered Rate (LIBOR) USD 3 Month – This measurement tracks the LIBOR on a three-month basis and is measured in U.S. dollars.
LTM – Last 12 months.
M
Mark to Market (MTM) – Method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution’s or company’s current financial situation based on current market conditions. In trading and investing, certain securities, such as futures and mutual funds, are also marked to market to show the current market value of these investments.
Market Capitalization – Total U.S. dollar market value of a company’s outstanding shares of stock. Commonly referred to as “market cap,” it is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share.
Market Price – In the case of an ETF, (i) the official closing price of the ETF; or (ii) if it more accurately reflects the market value of an exchange-traded fund share (a share of stock issued by the ETF) at the time as of which the ETFcalculates current NAV per share, the price that is the midpoint between the national best bid and national best offer as of that time. It should not be confused with the fund’s NAV.
Mortgage-Backed Securities (MBS) – Investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.
Money Supply – Refers to the total amount of currency and other liquid financial products in an economy at a particular time.
M1 Money Supply – The money supply that is composed of currency, demand deposits, other liquid deposits—which includes savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash.
M2 Money Supply – Calculation of the money supply that includes all elements of M1 as well as “near money.” These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.
M3 Money Supply – Calculation of the money supply that includes M2 as well as large deposits, institutional money market funds, short-term repurchase agreements (repo) and larger liquid assets.
N
Net Asset Value (NAV) – Net value of an entity calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange-traded fund (ETF), the NAV represents the per share/unit price of the fund at a specific date or time.
Non-Agency Commercial Mortgage-Backed Security (CMBS) – Debt-based security (similar to a bond), backed by the interest paid on loans for commercial properties. “Non-Agency” refers to CMBS not issued by the government-sponsored enterprises.
Non-Agency Residential Mortgage-Backed Security (RMBS) – Debt-based security (similar to a bond), backed by the interest paid on loans for residences. The interest on loans such as mortgages, home-equity loans and subprime mortgages is considered to be something with a comparatively low rate of default and a comparatively high rate of interest, since there is a high demand for the ownership of a personal or family residence. “Non-Agency” refers to RMBS not issued by the government-sponsored enterprises.
O
P
Par – Short for “par value,” par can refer to bonds, preferred stock, common stock or currencies, with different meanings depending on the context. Par most commonly refers to bonds, in which case, it means the face value, or value at which the bond will be redeemed at maturity.
Premium/Discount – A premium or discount to the net asset value (NAV) occurs when the market price of an ETF on the exchange rises above or falls below its NAV. If the market price is higher than the NAV, the ETF is said to be trading at a “premium.” If the price is lower, it is trading at a “discount.”
Price-to-Cash Flow or Price/Cash Flow (P/CF) Ratio – A stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow (OCF), which adds back non-cash expenses such as depreciation and amortization to net income.
Price/Earnings-to-Growth (PEG) Ratio – A stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while also factoring in the company’s expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio.
Price-to-Book or Price/Book (P/B) Ratio – Used by companies to compare a firm’s market capitalization to its book value. It’s calculated by dividing the company’s stock price per share by its book value per share (BVPS). An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation.
Price-to-Earnings (P/E) Ratio – This ratio for valuing a company measures current share price relative to earnings per share (EPS). The P/E ratio is also sometimes known as the “price multiple” or the “earnings multiple.” A high P/E ratio could mean that a company’s stock is overvalued, or investors are expecting high growth rates in the future.
Price-to-Sales or Price/Sales (P/S) Ratio – Valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value that financial markets have placed on each dollar of a company’s sales or revenues. The P/S ratio can be calculated either by dividing the company’s market capitalization by its total sales over a designated period (usually 12 months) or on a per-share basis by dividing the stock price by sales per share. The P/S ratio is also known as a “sales multiple” or “revenue multiple.”
Q
Quantitative Easing (QE) – An unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets, and lowering their yield, while simultaneously increasing the monetary base.
Quantitative Tightening (QT) – Reverse of quantitative easing (QE); a central bank that acquired financial assets under QE undertakes steps to reduce its balance sheet.
R
Real Estate Investment Trusts (REITs) – Publicly traded entities that invest in office buildings, apartment complexes, industrial facilities, shopping centers and other commercial spaces. Most REITs trade on major stock exchanges or over the-counter.
Residential Mortgage-Backed Security (RMBS) – Are a debt-based security (similar to a bond), backed by the interest paid on loans for residences. The interest on loans such as mortgages, home-equity loans and subprime mortgages is considered to be something with a comparatively low rate of default and a comparatively high rate of interest since there is a high demand for the ownership of a personal or family residence.
Return on Equity (ROE) –A measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets.
S
Secured Overnight Financing Rate (SOFR) – Benchmark interest rate for U.S. dollar-denominated derivatives and loans that is replacing the London Interbank Offered Rate (LIBOR). This transition is expected to increase long-term liquidity but also result in substantial short-term trading volatility in derivatives.
Smart Beta – The goal of smart beta is to obtain alpha, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio. In effect, smart beta is a combination of efficient-market hypothesis and value investing. The smart beta investment approach applies to popular asset classes such as equities, fixed income, commodities, and multi-asset classes.
Small/Mid-Capitalization (SMID) – A contraction of small and medium-market capitalization securities.
Spending-to-GDP Ratio – Metric comparing government spending to the country’s gross domestic product (GDP) to assess a country’s fiscal management. Government spending to GDP can be a misleading ratio as it does not take into consideration revenue earned by the government or how the money is used and how efficiently.
Spread – Difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings or risk.
Stagflation – Period characterized by slow economic growth and relatively high unemployment (or economic stagnation) which is at the same time accompanied by rising prices (i.e., inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).
Standard Deviation – Measure of the variation or dispersion of a set of data from its mean or expected/budgeted value. A low standard deviation indicates that the data points tend to be very close to the mean, whereas a high standard deviation indicates that the data is spread out over a large range of values. A measure of an investment’s volatility.
T
Taper Tantrum – The 2013 surge in U.S. Treasury yields as a result of the Federal Reserve’s announcement that it would be reducing the pace of its purchases of Treasury bonds, thus, reducing the amount of money it was feeding into the economy. The ensuing rise in bond yields in reaction to the announcement was referred to as the “Taper Tantrum” in financial media.
Tapering – Gradual slowing of the pace of the Federal Reserve’s large-scale asset purchases that were put in place as part of the Fed’s quantitative easing (QE) policies.
Total Return – Actual rate of return of an investment or pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given evaluation period.
Tracking Error – Divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge fund, mutual fund, or exchange-traded fund (ETF) that did not work as effectively as intended, creating an unexpected profit or loss.
Treasury Inflation-Protected Securities (TIPS) – Type of Treasury security issued by the U.S. government that is indexed to inflation in order to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain their real value.
TTM – Trailing 12 months.
U
U.S. Treasuries (UST) – Commonly used for references to the Treasury debt that the U.S. issues.
V
Value Stock – Shares of a company that appear to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors.
Volatility – Statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
W
Weighted Average Maturity (WAM) – Current weighted average of the remaining time to maturity (measured in months) of the loans/pools backing a security.
Weighted Average Market Capitalization – Refers to a type of stock market index construction that is based on the market capitalization of the index’s constituent stocks.
Weighted Average Duration – Weighted average term to maturity of the cash flows from a bond.
X
Y
Yield Curve – A line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve) and flat.
Yield to Duration (YTD) – The yield of a bond if you were to buy and hold it until the time at which the price of the bond can be repaid by its internal cash flows.
Yield to Maturity (YTM) – The total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate.
Yield to Worst (YTW) – The lowest yield of a bond that can be received short of default.
Z
