Arbitrage

An investing method in which an investor simultaneously buys and sells the same or similar security to take advantage of a price difference. In the case of ETFs, it is the difference between the current ETF price and the value of the underlying securities.

Ask price (Ask)

The lowest price any seller is willing to accept for a given ETF security or an ETF.

Authorized participant

Usually a large broker dealer that satisfies industry requirements for the creation/redemption process— securing the underlying assets to create the ETF.

Bid/ask spread (Spread)

The difference between the stock’s or ETF’s current bid and ask price. The spread represents a cost for selling and buying a security or an ETF.

Bid price (Bid)

The highest price any buyer is willing to pay for a given security or an ETF.

Creation unit

Large blocks of shares (usually 50,000) that facilitate the ETF creation/redemption process. These units are created and sold to authorized participants or institutions by ETF fund advisors. After purchasing these creation units the authorized participants often split them up and sell them to individual investors. This allows the individual investors to purchase individual shares of ETFs instead of the creation units.

Custodian Bank

A banking institution that holds in custody and safekeeping the securities and other assets of an investment company.

Intraday Indicative Value (IIV)

Published throughout the trading day as a reference value and used in conjunction with other ETF market information. The IIV is based on the last sale prices of securities specified for creation or redemption, plus any estimated cash amounts associated with the creation unit.

Liquidity

An asset’s ability to be bought or sold in the market, or quickly converted into cash.

Market price

The last reported price at which a security was traded on an exchange.

Net Asset Value (NAV)

The dollar value of a single ETF share, based on the value of the underlying assets of the fund, minus its liabilities, divided by the number of shares outstanding. NAV is calculated at the end of each business day.

Portfolio Composition File

This is a file created by the ETF fund manager or trustee each day after market close. Its purpose is to tell Authorized Participants the securities and share quantities that would be required to affect a creation or redemption on the next trading day. The exchanges also use the Portfolio Composition File to calculate the Intraday Indicative Value.

Tax Basis

The purchase price, including commissions and other expenses, used to determine capital gains and capital losses for tax purposes.