ETFs Glossary

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Sector breakdown

Percentage of a fund's equity holdings in various industries.

Sector rotation

A strategy that uses elements of market timing to identify business sectors of the economy that are in a position to either under or outperform. For example, if an investor owned the iShares Dow Jones U.S. Utilities ETF (Amex: XLU), but felt this index was ready to underperform versus other sectors, one might consider selling this holding in favor of another one with a better outlook. In short, this particular investor would be exiting or rotating out of one sector for another.

Securities and Exchange Commission

Federal agency that regulates U.S. financial markets, also known as SEC.

SEC yield

A yield calculation developed by the SEC to standardize yield data for mutual funds, close-end funds, and ETFs. The calculation uses the fund's net investment income over the last 30 days, minus income generated from capital gains or other sources. SEC yields are often quoted for bond funds.

Share classes

Some mutual funds use multiple share classes for the same underlying portfolio. For example, Class A shares would allow an investor to pay an upfront sales charge to enter a fund, whereas a Class B share would defer the sales charge based on how long the investor stays in the fund. Some mutual fund families only offer conventional share classes. Others, like Vanguard's VIPERs are offering ETF versions of their funds.

Sharpe ratio

A risk-adjusted measurement of fund performance. Sharpe ratio is calculated by dividing the excess return of a fund over the risk-free rate (Treasury bonds) by its standard deviation. The higher the Sharpe ratio, the better a fund's risk-adjusted performance.

Small cap

Refers to companies with a market capitalization between $1 billion and $250 million.

Spiders (SPDRs)

SPDRs, or Standard & Poors' Depository Receipts. A group of ETFs that track a variety of Standard & Poors' indexes. SPDR Trust, Series 1, usually referred to as "Spiders," tracks the S&P 500 index. Select Sector SPDRs track various sector indices that carve up the S&P 500 index into separate industry groups. SPDR Trust, Series 1 is structured as a unit investment trust, but Select Sector SPDRs are open-end funds.

Standard deviation

Measure of fund volatility in percentages. Standard deviation measures the average variability of the fund's returns over a time period. Stable investments like money market funds have standard deviations near zero, while high-risk equity funds often have a much higher one. A standard deviation of 10 means approximately 68% of the time a fund will be within 10% of its mean (average) price.

StreetTracks

A group of ETFs managed by State Street Global Advisors. These ETFs track various indexes, including Dow Jones style-specific and global indexes, technology indexes from Morgan Stanley Dean Witter, and the Wilshire REIT index. StreetTracks are open-end funds, not unit investment trusts, and trade on the American Stock Exchange.

Style drift

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