Understand investment products, market mechanics, indicators and research terminology. Each entry includes an explanation, example, cautions and related learning.
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A benchmark is a reference standard, usually an index or a blend of indexes, against which the performance and risk of a fund, portfolio or strategy is measured. It provides a yardstick for judging whether results came from skill, risk-taking or simply market movement.
An exchange-traded fund is an investment fund whose units are listed and traded on a stock exchange throughout the trading day, usually tracking an index, a sector or a basket of assets. It combines a pooled portfolio with the ability to buy and sell like a share.
The expense ratio is a fund's annual operating costs, such as management, administration and custody fees, expressed as a percentage of its average net assets. It is deducted from the fund's assets, so it lowers returns without appearing as a separate bill.
A mutual fund pools money from many investors to buy a diversified portfolio of securities run by a professional manager, with each investor owning units in proportion to the amount invested. Depending on the jurisdiction, such funds may be set up as unit trusts or investment companies.
Net asset value is the total value of a fund's assets minus its liabilities, usually quoted per unit or share. It is the fund's underlying value at a valuation point, not necessarily the price at which units trade.
Total return measures the overall gain or loss on an investment over a period, combining price change with income received such as dividends, interest or fund distributions. It is usually shown as a percentage of the starting value.
Tracking difference is the signed gap between a fund's return and its benchmark's return over a stated period, found by subtracting the benchmark return from the fund return. A negative value means the fund lagged the benchmark and a positive value means it exceeded it.
Tracking error is the standard deviation of the return gap between a fund or portfolio and its benchmark over time, usually annualized. It measures how consistently a fund follows its benchmark, not whether it is ahead of or behind it.