Exchange-Traded Funds For Dummies®, 2nd Edition

Appendix B

Glossary

If you’re going to be an ETF investor, you need to know the lingo. If you’re not going to be an ETF investor, you can still use the following phrases to impress at cocktail parties and Republican fundraising events. Please note that any word in italic (except for the word italic) appears as its own entry elsewhere in the glossary.

Active investing. Ah, to beat the market. Isn’t it every investor’s dream? Through stock picking or market timing, or both strategies, active investing offers hope of market-beating returns. Alas, it sounds a lot easier than it really is. Compare to passive investing.

Alpha. Given a certain level of risk, you should expect a certain rate of return. If your stock/fund/portfolio return exceeds that expectation, congratulations! You’ve just achieved what people in the finance world call “positive alpha.” Pass the caviar. If your stock/fund/portfolio return falls shy of that expectation, you are in the dark and depressing land of “negative alpha.” Pass the herring.

Ask price. The rock-bottom price that any stock or ETF seller is willing to accept. If any buyer is willing to fork over that amount, a sale is made. If no buyers are willing to match the ask price, gravity will eventually start to drag down the price of the stock. Compare to bid price and spread.

Asset class. To build a diversified portfolio (meaning not having all your eggs in one flimsy straw basket), you want to have your investments spread out among different asset classes. ...