Slideshow BACKWARDATION & CONTANGO: The ETFs Glossary

Published
  • January 19 2012, 10:35am EST
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BACKWARDATION & CONTANGO: The ETFs Glossary<br><br>

Exchange-traded funds are like stocks. Except they're not. More shares can be created (or redeemed) as the day goes on. Exchange-traded funds are like mutual funds. Except they're not.


ETF shares get priced all day long, mutual fund shares only at the end. Exchange-traded funds threaten market stability. Only they don't.


Here's a glossary on how ETFs really operate.

BACKWARDATION & CONTANGO: The ETFs Glossary

An above-average return.

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BACKWARDATION & CONTANGO: The ETFs Glossary

A firm authorized to create (trade stocks for an ETF) and redeem (trade an ETF for stocks) shares in an exchange-traded fund.

BACKWARDATION & CONTANGO: The ETFs Glossary

The geometric mean of the market capitalizations of all the stocks in a fund portfolio.

BACKWARDATION & CONTANGO: The ETFs Glossary

A condition that occurs when the price of a commodity for delivery on a future date is lower than the spot price for delivery of the commodity today. The condition occurs when commodity ETFs must roll their futures positions into new contracts as old ones expire.

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BACKWARDATION & CONTANGO: The ETFs Glossary

Often indicates a marketplace perception that an immediate shortage of a particular commodity is at hand.

BACKWARDATION & CONTANGO: The ETFs Glossary

Funds that invest in both stocks and bonds in substantial amounts.

BACKWARDATION & CONTANGO: The ETFs Glossary

A measure of volatility. If a fund has a beta of 1, then it has the same volatility as its benchmark index. If a fund has a Beta higher than 1, it is moving up and down more than the rest of the market. A fund with a beta of 2 will move up 20% when the market rises 10%.

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BACKWARDATION & CONTANGO: The ETFs Glossary

An active fund with higher fees that actually tracks an index fairly closely.

BACKWARDATION & CONTANGO: The ETFs Glossary

A condition that occurs when the price of a commodity or other asset is higher on a future delivery date than the current spot price for delivering the asset. The condition occurs when commodity ETFs must roll their futures positions into new contracts as old ones expire.

BACKWARDATION & CONTANGO: The ETFs Glossary

The smallest block of shares in an exchange-traded fund that can be purchased or redeemed directly from the fund company at net asset value. Creation units are usually transacted in 50,000-share increments. Instead of receiving cash, the seller of a creation unit would receive a basket of securities that corresponds to the portfolio holdings in a particular ETF.

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BACKWARDATION & CONTANGO: The ETFs Glossary

European, Australia and Far East index computed and published by MSCI.

BACKWARDATION & CONTANGO: The ETFs Glossary

ETFs or exchange-traded funds are low-cost index funds that trade like stocks. ETFs can be bought or sold when the stock market is open for trading. ETFs can be sold short, leveraged with margin, hedged with call or put options or bought and held.

BACKWARDATION & CONTANGO: The ETFs Glossary

ETNs are unsecured debt securities that pay a return linked to the performance of a single security or index. ETNs don’t usually pay a dividend or annual coupon and they have maturity dates that can range up to 30 years. ETNs held to maturity pay the return of the note’s underlying index minus its annual expense ratio.

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BACKWARDATION & CONTANGO: The ETFs Glossary

ETF that at creation follows an index but remains static and does not attempt to track it.

BACKWARDATION & CONTANGO: The ETFs Glossary

A reevaluation of an index that involves adding, removing, and re-ranking components of an index.

BACKWARDATION & CONTANGO: The ETFs Glossary

The process of realigning the weightings of components of an index.

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BACKWARDATION & CONTANGO: The ETFs Glossary

The return of the benchmark index that the fund seeks to track or beat.

BACKWARDATION & CONTANGO: The ETFs Glossary

Indicative Optimized Portfolio Value. A calculation provided by a stock exchange that approximates the fund's net asset value every 15 seconds throughout the day.

BACKWARDATION & CONTANGO: The ETFs Glossary

The main objective is to deliver inverse or opposite performance to a particular stock, bond or commodity index. Most short ETFs attempt to duplicate the return of a daily index, except in the opposite direction.

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BACKWARDATION & CONTANGO: The ETFs Glossary

The main objective of a leveraged ETF is to deliver magnified performance of a particular stock, bond or commodity index. Most leveraged ETFs attempt to duplicate daily index returns by two or three times.

BACKWARDATION & CONTANGO: The ETFs Glossary

A reduction of portfolio performance due to various factors. An example of performance drag occurs when gains within a portfolio are offset by various expenses, such as management fees, transaction costs and taxes.

BACKWARDATION & CONTANGO: The ETFs Glossary

This is the yield achieved by the rollover of futures contracts into new contracts. Profiting from roll yield is a common goal for many strategies used by traders in futures.

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BACKWARDATION & CONTANGO: The ETFs Glossary

In 1984, Frank Russell Company created the Russell family of stock indexes as part of a more accurate and comprehensive system for evaluating the performance of investment managers. Russell now maintains 21 U.S. stock indexes and has launched similar broad-market and style indexes in Japan.

BACKWARDATION & CONTANGO: The ETFs Glossary

R-squared measures the correlation of a fund’s movement in comparison to its corresponding benchmark. An R squared score of 1.00 would indicate a perfect correlation, whereas a score of 0.00 indicates no correlation.

BACKWARDATION & CONTANGO: The ETFs Glossary

When a fund moves away from its stated investment objective or the nature of its targeted asset class change over time.

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BACKWARDATION & CONTANGO: The ETFs Glossary

First and largest ETF, Standard & Poor's Depositary Receipts (SPDRs) track the S&P 500 and are pronounced just like the name for an arachnid.

BACKWARDATION & CONTANGO: The ETFs Glossary

A form of portfolio risk that arises when the possibility that an investment will move more than three times the normally expected amount from a given point. In effect: the risk that a Black Swan event will occur, like a Flash Crash.

BACKWARDATION & CONTANGO: The ETFs Glossary

A positive Treynor Ratio indicates that the investment provided a return in excess of the additional risk borne by the investor. A negative Treynor Ratio indicates that the investment did not provide sufficient excess return over a safe asset for the return provided.