The process of hand selecting securities with the purpose of trying to outperform a benchmark index. Active portfolio managers use economic data, investment research, market forecasts, and other indicators to help make investment decisions.

The return from an investment after all income taxes have been accounted for and deducted.  The SEC has adopted a number of rule and form amendments requiring mutual funds to disclose standardized after-tax returns. The amendments require a mutual fund to disclose standardized after-tax returns for 1-, 5-, and 10-year periods in the risk/return summary of the prospectus.

A mathematical measurement of the amount of return expected from an investment.  For example, an alpha of 1.20 indicates that a stock is projected to rise 20% in a year when the return on the market and stock’s beta are both zero. Generally, a low priced investment in relation to its alpha is considered a good choice because of its undervalued status.

The AMEX was known until 1921 as the “Curb Exchange”, and to this day is sometimes affectionately referred to as the “Curb”.  The stocks and bonds traded on the AMEX tend to be those of smaller to medium sized companies compared to firms listed on competing exchanges like the NYSE and NASDAQ.  In recent years, the AMEX has become a leading developer and listing place for exchange-traded funds or ETFs. The AMEX is located in downtown Manhattan.

The process of apportioning investments among various asset classes, such as stocks, bonds, commodities, real estate, collectibles and cash equivalents.  Asset allocation affects both the risk and return of investors, and is often used as a core strategy in basic financial planning.

Refers to the categorization of an asset. Examples of key asset classes include stocks, bonds, commodities, currencies, real estate, collectibles, and cash.

This term refers to large financial institutions, such as specialist firms and market makers, which are involved in the creation and redemption activity of exchange-traded funds.

Measurement used to quote bonds. One basis point is equal to 0.01%, or one one-hundredth of one percent. 100 basis points is equal to 1%, whereas 50 basis points would equal one half percent, or 0.50%.

A unit or group of securities.  ETFs are some times referred to as baskets.

A standard index used for measuring the performance of an investment. The goal of most money managers and investors is to outperform their respective benchmark.

A volatility measurement of a fund or stock versus the Standard & Poor’s 500 Stock Index.  A fund or stock with a higher beta than the Standard & Poor’s 500 will rise or fall greater. To the contrary, a stock or a fund with a low beta will rise or fall less.

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, making them large dollar transactions limited to large institutions and other authorized participants.  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. This “in-kind” transfer process is unique to ETF’s and does not create tax consequences for the seller.

A sales charge deducted from an investment for exiting early, or before the sales charge ceases to exist. Mutual fund class B and C shares often carry a deferred sales charge.  Also called back end load, CDSC or contingent deferred sales charge.

The price discount or difference between a fund’s net asset value (NAV) and the actual value of its portfolio holdings. Some closed end funds and ETFs may trade at a discount to NAV.

Distribution of earnings paid out to shareholders. With mutual funds and ETFs, dividends can be a result of capital gains, interest income, or dividends paid to the fund itself by securities within the portfolio. Dividends are often paid quarterly, but the frequency can be less and is determined by fund management.

The distribution rate of a fund calculated by dividing the amount of the dividends per share by the per share market price of the fund. For example, a fund price of $20 that pays a $2 dividend per year has a 10% dividend yield.

The DJIA is a widely followed barometer of U.S. stock market performance. The average is stock price weighted and measures 30 major companies in diversified industries, such as banking, consumer staples, retail, healthcare, and technology.

European, Australia, and Far East index computed and published by Morgan Stanley Capital International. (MSCI)

A market theory that dissuades investors from using fundamental research to find undervalued or mis-priced securities.  The central idea is that market prices already reflect the full knowledge of investors, which makes it impossible to outperform the market.

Refers to the financial markets or economy of a developing nation, which is often new, immature or has a short history.

This market strategy seeks incremental outperformance of a benchmark index without changing the profile characteristics of the index.  By using leverage, options trading, or another mechanism, enhanced indexing offers the potential of outperforming a benchmark index.

This is an index strategy that weights all securities inside an index equally. In other words, all index components are given equal representation and have the same impact on the performance and volatility of the index.

ETNs are debt securities that are linked to stock, bond, currency, or commodity indexes. Investors that opt to keep their ETN to maturity receive a cash payment calculated from the beginning trade date to the ending period, or maturity date. Applicable fees are deducted and can reduce the value of the payment. ETNs can also be sold prior to maturity on the exchange where they trade or they can be redeemed in large blocks.

A mutual fund or ETF that seeks to match the exact performance of a specific market or benchmark index. Index funds are sometimes referred to as passive funds, and are popular for their tax efficiency and low fees. Popular index funds include those that track the S&P, Russell, and Dow Jones indices.

Indexing is an investment strategy that seeks to match the performance of a specific financial market or benchmark index.

A financial tool that categorizes exchange-traded funds (ETFs) and related products into nine grid shapes with each shape representing a specific index strategy. The vertical axis groups index strategies into three broad methods for selecting securities: passive, screened, and quantitative. The horizontal axis categorizes index strategies into three broad security weighting methods: market capitalization, fundamental, and fixed/equal weight.

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.

Bonds whose issuers are rated AAA to BBB for safety and ability to repay principal by Standard & Poor’s or Moody’s Investors Service.

Indicates the approach of an investment manager in selecting securities. For example, a certain manager may be value oriented, whereas another may emphasize growth.

Refers to companies with a market capitalization over $5 billion.

Margin and use of option contracts are forms of leverage which allow investors to enhance their returns without adding to their investments.

Ability to rapidly buy or sell an asset without substantially affecting the asset’s price.  ETFs with limited trading activity are generally not considered liquid because a large buy or sell order can dramatically impact the price and volatility. Liquidity also refers to the relative ease with which an asset can be converted into cash.

Refers to companies with a market capitalization between $1 billion and $5 billion.

Morgan Stanley Capital International, Inc. (MSCI) distributes index and company-level data and also licenses the MSCI indices to third parties for the purposes of creating Mutual Funds, listed and OTC derivatives, ETFs, and other products.

NASDAQ is the largest U.S. electronic stock market and the primary market for trading NASDAQ-listed stocks. With approximately 3,200 companies, it lists more companies and, on average, trades more shares per day than any other U.S. market. It is home to companies that are leaders across all areas of business, including technology, retail, communications, financial services, transportation, media and biotechnology.

Represents the per share price of a mutual fund. With closed end funds and ETFs, the true NAV is not always reflected in the share price of the security because it may trade at a premium or discount to the NAV. The calculation of NAV is the fund’s total net assets divided by the number of shares outstanding, minus fees and expenses.

Located on Wall Street in New York, this is the oldest and largest stock exchange in the U.S. In 2007, the NYSE Group and Euronext combined forces to bring together major marketplaces across Europe and the United States. Also known as the “Big Board”, or “NYSE Euronext.”

This type of fund structure reinvests dividends the date of receipt and pays them out via a quarterly cash distribution. This ETF structure is also permitted to use derivatives, loan securities and it’s registered under the SEC Investment Company Act of 1940. ETFs that utilize this legal structure include iShares and the Select Sector SPDRs.

A market strategy that involves selecting a benchmark index to assure investment performance is the same as the underlying index.  Passive investing assures that an investor will not underperform (or outperform) a market index. Passive management is opposite of active management.

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, research costs, etc. These expenses create a drag or negative effect on the portfolio’s performance.

Relates to the frequency with which a money manager is buying and selling securities within a fund. High portfolio turnover translates into higher trading costs whereas low portfolio turnover is better because it lessens the impact of trading and tax related costs.

The price premium or difference between a fund’s net asset value (NAV) and the actual value of its portfolio holdings. Some closed end funds and ETFs may trade at a premium to NAV.

Required by securities laws and issued by mutual fund companies and ETFs, the prospectus is a legal document that discloses the investment objectives of the fund, operating history, fund management, management fees, portfolio holdings, and other related financial data. Brokers are required to give a prospectus to investors before they invest.

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

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.

Federal agency created by the Securities Exchange Act of 1934 with the primary mission of protecting investors and maintaining the integrity of the securities markets.  The SEC has five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year.

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.

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.

A measure of a fund’s historical returns adjusted for risk or volatility. The calculation is fund return minus the return on 3-month treasury bills divided by the fund standard deviation.

Short ETFs and funds are designed to increase in value when a certain stock, bond, or currency market declines in value.

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

A measure of the degree to which a fund's return will vary from its historical returns or from the average of similar funds. Large standard deviations indicate greater risk and performance fluctuations from the average return.

Style drift happens when a fund diverts from its prospectus defined investment strategy to pursue another course.

This market strategy focuses on selling a portfolio's worst performing security to 1) offset realized capital gains of winning securities, and 2) to reinvest the sale proceeds into securities with a similar investment objective or correlation.

Refers to the visibility level of securities holdings within a given portfolio or fund. Generally, the transparency of an index fund will be greater than an actively managed fund. This is due to the fact that holdings within an index fund are openly disclosed and available.

An attempt to predict the performance of a security by spotting trends in price, without regard to the underlying fundamentals, such as cash flow and balance sheet. Sometimes referred to as “charting”.

The lettering system used to identify a stock, mutual fund, or ETF on an exchange. Also called trading symbols.

Relates to the frequency with which a money manager is buying and selling securities within a fund portfolio. High turnover translates into higher trading costs, which fund investors must pay. Low portfolio turnover is better because it lessens the impact of trading and tax related costs.

12b-1 fees, also known as distribution fees, are one component of a mutual fund's annual fund operating expenses and can be thought of as an alternate way of paying sales-related expenses, such as compensating investment professionals. A fund can have 12b-1 fees only if its board of directors has approved a 12b-1 plan authorizing their payment.

This type of fund structure does not reinvest dividends in the fund and pays them out via a quarterly cash distribution. In order to comply with diversification rules, this ETF structure will sometimes deviate from the exact composition of a benchmark index. This type of fund is registered under the SEC Investment Company Act of 1940. The “Dow DIAMONDS”, PowerShares QQQ Trust, and S&P 500 “SPDRs” follow this format.

The rise and fall price movement of a security. Securities that rise or fall rapidly within a short time frame are considered more volatile than those that don’t. (See Beta)

Total number of shares or contracts traded for a given security. Volume data is tracked and reported daily by major stock exchanges around the world.

An IRS tax rule that prohibits claiming a loss on the sale of an investment if it or a substantially identical investment is purchased within 30 days before or after the sale.

Denotes the selling weak of performing stocks or bonds by money managers just before the end of each reporting quarter, so they don't appear as significant investment positions. This selling activity is often accompanied with buying activity of strong performing stocks and bonds. After quarterly reports are issued, the portfolio will reveal holding positions in strong performing stocks and bonds, despite the fact that the majority of the capital gains in these were never experienced by shareholders. Window dressing is a cosmetic affect and adds little or no value.

The period beginning at the start of the calendar year up until the most current date.

A graph that illustrates the relationship between the yields of bonds with the same credit quality, but with varying maturities. A positive yield curve means short term interest rates are lower versus long term rates. A negative yield curve is just the opposite, whereas a flat yield curve shows little variance in the yields of short term bonds versus long term bonds.

The difference in yield between bonds.

The rate of return received by an investor for holding their securities to their maturity date.