ETF Glossary
Every ETF term explained simply, from management fees to correlation, including synthetic replication.
20 terms
D
DCA (Dollar Cost Averaging)
DCA means investing a fixed amount at regular intervals regardless of market conditions. This strategy reduces bad-timing risk and builds a savings discipline.
Distributing ETFs (vs accumulating)
A distributing ETF pays dividends in cash. An accumulating ETF reinvests them automatically. For most long-term investors, accumulating is preferable.
E
ETF correlation
Correlation measures how closely two ETFs' performances move together (from -1 to +1). Low correlation between portfolio assets improves real diversification.
Emerging markets (MSCI Emerging Markets)
The MSCI Emerging Markets index covers large caps in 24 emerging countries: China, India, Taiwan, Brazil... High growth potential with greater volatility.
ETF Overlap
Overlap measures the portfolio overlap between two ETFs: the share of your investment in one that is also covered by the other. High overlap means holding both ETFs does not diversify.
M
Maximum drawdown
Maximum drawdown measures the largest loss from a peak to the subsequent trough. It is the most concrete risk indicator to test psychological resilience.
MSCI World index
The MSCI World covers ~1,500 large and mid-cap stocks in 23 developed countries. Market-cap weighted, it is ~70% dominated by the United States.
P
PEA (Plan d'Épargne en Actions)
The PEA is a French tax-advantaged account allowing ETF investment with capital gains tax exemption after 5 years. Cap: €150,000 per person.
Physical replication
Physical replication means an ETF directly buys the securities in its index. It is the most transparent method, used by iShares, Vanguard and SPDR.
Portfolio rebalancing
Rebalancing means restoring a portfolio's weights to their initial targets after market movements have caused drift. A disciplined practice but fiscally costly.
S
S&P 500 index
The S&P 500 represents the 500 largest US-listed companies. It is the world's most followed equity index, with ETFs as cheap as 0.07% TER.
Sharpe ratio
The Sharpe ratio measures the excess return of an investment per unit of risk (volatility). It allows comparing ETFs of different risk levels on a common basis.
Synthetic replication
Synthetic replication uses swaps to replicate index performance without buying the underlying securities. Essential method for PEA-eligible global ETFs.
T
TER (Total Expense Ratio)
The TER (Total Expense Ratio) is the annual fee charged on an ETF's assets. Understanding TER is essential for comparing the real costs of two index funds.
Tracking Difference
Tracking difference measures the actual annual performance gap between an ETF and its index. It is the best indicator of the real total cost of an index fund.
Tracking Error
Tracking error measures how consistently an ETF follows its index via the standard deviation of daily performance gaps. A low tracking error means faithful replication.