Index Fund & ETF Terms

A financial institution permitted to create and redeem ETF shares directly with the fund.

Example: The authorised participant buys underlying shares and exchanges them for ETF units.

Authorised Participant is a financial institution permitted to create and redeem ETF shares directly with the fund; the ETF mechanism explains how ETF shares move between the primary marketThe market in which newly issued securities are sold and the issuer receives capital., where large blocks are created or redeemed, and the secondary marketThe market in which existing securities trade among investors., where investors trade.

The authorised participant buys underlying shares and exchanges them for ETF units.

Before trading around Authorised Participant, use limit orders and distinguish a persistent structural gap from a temporary difference caused by stale prices or market hours; a liquid-looking ETF can hold illiquid underlying assets.

An organisation that publishes a benchmarkA reference index or rate used to evaluate a fund's performance. rate or index.

Example: The fund licences its benchmark from an independent provider.

Benchmark Provider is an organisation that publishes a benchmark rate or index; separate the rule from the product. The same index or factor can be delivered through a fund, ETF, derivativeA contract whose value depends on an underlying asset, rate, index, or event. or separately managed portfolioThe complete collection of investments owned by an investor or managed under one mandate..

The fund licences its benchmark from an independent provider.

Evaluate Benchmark Provider through holdings and exposures rather than the product name; measure concentrationThe degree to which a portfolio depends on a small number of holdings, sectors, or issuers., turnover, tracking differenceThe actual return difference between an index-tracking fund and its benchmark over a period. and performance across full cycles. Low stated fees do not eliminate turnover or market-impact costs.

An index covering a large portion of an investable market.

Example: A broad-market fund holds large, mid, and small companies.

Broad-Market Index is an index covering a large portion of an investable market; the outcome from the rule depends on index construction: eligible universe, weighting method, rebalance dates, turnover, costs and treatment of distributions.

A broad-market fund holds large, mid, and small companies.

For Broad-Market Index, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. Back-tested performance can be sensitive to data mining and implementation assumptions.

A large block of ETF shares exchanged between the fund and authorised participants.

Example: An authorised participant delivers a basket of securities and receives 50,000 ETF shares.

Creation Unit is a large block of ETF shares exchanged between the fund and authorised participants; the ETF mechanism is driven by the creation and redemptionThe process of selling fund units back to the fund in exchange for cash. process, authorised participants, the liquidityThe ease and speed with which an investment can be converted into cash without a major price concession. of the underlying assets and the ETF's own order bookA record of outstanding buy and sell orders arranged by price and often time priority..

An authorised participant delivers a basket of securities and receives 50,000 ETF shares.

A practical review of Creation Unit measures both the premium or discount and the cost of crossing the spread at the intended trade size; creation and redemption narrows gaps but does not guaranteeA contractual promise by another party to meet an obligation if the primary debtor does not. that they vanish immediately.

An index designed for a specific investorA person or organisation that commits capital with the expectation of a financial return., product, or strategy.

Example: A pension scheme commissions a low-carbon custom index.

Custom Index is an index designed for a specific investor, product, or strategy; the outcome from the rule depends on index construction: eligible universe, weighting method, rebalance dates, turnover, costs and treatment of distributions.

A pension scheme commissions a low-carbon custom index.

Evaluate Custom Index through holdings and exposures rather than the product name; measure concentration, turnover, tracking difference and performance across full cycles. Rules remove discretion but do not remove investmentAn asset or commitment of money made with the expectation of future income, growth, or both. risk.

The amount by which an ETF's market price falls below its net asset valueThe value of a fund's assets minus its liabilities, usually expressed in total and per unit. per share.

Example: An ETF at ₦9.80 with NAV of ₦10 trades at a 2% discount.

ETF Discount is the amount by which an ETF's market price falls below its net asset value per share; the ETF mechanism explains how ETF shares move between the primary market, where large blocks are created or redeemed, and the secondary market, where investors trade.

An ETF at ₦9.80 with NAV of ₦10 trades at a 2% discount.

For ETF Discount, compare the executable bid with current NAV or indicative value and inspect whether the underlying assets are trading. A discount can reflect stale pricing, liquidity stress or genuine arbitrageSeeking to profit from price differences for the same or closely related assets while limiting directional risk. limits.

The amount by which an ETF's market price exceeds its net asset value per share.

Example: An ETF at ₦10.20 with NAV of ₦10 trades at a 2% premium.

ETF Premium is the amount by which an ETF's market price exceeds its net asset value per share. A premium arises when buyers pay more than the value of the ETF's underlying assets per unit. Creation and redemption normally pull the prices together, but market closures, thin trading or hard-to-price assets can let the gap persist.

For example, an ETF at ₦10.20 with NAV of ₦10 trades at a 2% premium.

For ETF Premium, compare the executable offer with current NAV or indicative value while the underlying market is open. A limit orderAn instruction to trade only at a specified price or better. prevents a thin order book from turning a small premium into a much larger purchase cost.

Holding all index constituents in approximately their benchmark weights.

Example: A 30-stock fund owns every stock in the index.

Full Replication means holding all index constituents in approximately their benchmark weights; the rule describes a systematic exposure, but implementation determines whether an investor receives the theoretical return after fees and trading frictions.

A 30-stock fund owns every stock in the index.

For Full Replication, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. A factor can underperform for many years even if its long-run rationale remains intact.

A statistical measure tracking the performance of a defined group of securities or assets.

Example: A broad equity index represents the listed market.

Index is a statistical measure tracking the performance of a defined group of securities or assets; the rule describes a systematic exposure, but implementation determines whether an investor receives the theoretical return after fees and trading frictions.

A broad equity index represents the listed market.

For Index, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. Low stated fees do not eliminate turnover or market-impact costs.

A securityA tradable financial claim or ownership interest, such as a share, bond, or fund unit. included in an index.

Example: A newly listed company becomes an index constituent.

Index Constituent is a security included in an index; the rule describes a systematic exposure, but implementation determines whether an investor receives the theoretical return after fees and trading frictions.

A newly listed company becomes an index constituent.

Evaluate Index Constituent through holdings and exposures rather than the product name; measure concentration, turnover, tracking difference and performance across full cycles. Back-tested performance can be sensitive to data mining and implementation assumptions; Also compare Net-Return Index, defined here as a total-return index that reinvests dividends after assumed withholding taxes.

The rules governing index eligibility, selection, weighting, calculation, and review.

Example: The methodology limits any one constituent to 10%.

Index Methodology is the rules governing index eligibility, selection, weighting, calculation, and review; separate the rule from the product. The same index or factor can be delivered through a fund, ETF, derivative or separately managed portfolio.

The methodology limits any one constituent to 10%.

A sound review of Index Methodology asks whether the rule is transparent, investable and robust to reasonable changes in the sample or definition; rules remove discretion but do not remove investment risk.

An organisation that designs, calculates, and maintains indices.

Example: The provider publishes methodology and constituent changes.

Index Provider is an organisation that designs, calculates, and maintains indices; the outcome from the rule depends on index construction: eligible universe, weighting method, rebalance dates, turnover, costs and treatment of distributions.

The provider publishes methodology and constituent changes.

Before investing through Index Provider, identify the economic reason the exposure should earn a return and the conditions under which it is likely to fail; a factor can underperform for many years even if its long-run rationale remains intact. Also compare Index Methodology, defined here as the rules governing index eligibility, selection, weighting, calculation, and review.

Adjusting constituent weights to restore the index methodology.

Example: The provider rebalances weights every quarter.

Index RebalancingRestoring a portfolio toward its target weights by buying or selling assets. describes adjusting constituent weights to restore the index methodology; the rule describes a systematic exposure, but implementation determines whether an investor receives the theoretical return after fees and trading frictions.

The provider rebalances weights every quarter.

For Index Rebalancing, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. Rules remove discretion but do not remove investment risk; Also compare Index Methodology, defined here as the rules governing index eligibility, selection, weighting, calculation, and review.

Adding and removing constituents during a scheduled index review.

Example: A fast-growing company enters during annual reconstitution.

Index Reconstitution describes adding and removing constituents during a scheduled index review; the rule uses a stated rule to select, weight, rebalance or measure securities, replacing at least part of discretionary security selection.

A fast-growing company enters during annual reconstitution.

Evaluate Index Reconstitution through holdings and exposures rather than the product name; measure concentration, turnover, tracking difference and performance across full cycles. A factor can underperform for many years even if its long-run rationale remains intact.

The process of building a portfolio intended to follow an index's return.

Example: The fund uses full replication for index tracking.

Index Tracking is the process of building a portfolio intended to follow an index's return; the rule uses a stated rule to select, weight, rebalance or measure securities, replacing at least part of discretionary security selection.

For example, the fund uses full replication for index tracking.

Before investing through Index Tracking, identify the economic reason the exposure should earn a return and the conditions under which it is likely to fail. Also compare Full Replication, defined here as holding all index constituents in approximately their benchmark weights.

The proportion of index holdings changed during rebalancing or reconstitution.

Example: Frequent constituent changes increase index turnover.

Index Turnover is the proportion of index holdings changed during rebalancing or reconstitution; the rule uses a stated rule to select, weight, rebalance or measure securities, replacing at least part of discretionary security selection.

Frequent constituent changes increase index turnover.

For Index Turnover, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. Rules remove discretion but do not remove investment risk.

A constituent's percentage contribution to an index.

Example: The largest company carries a 15% index weight.

Index Weight is a constituent's percentage contribution to an index; the outcome from the rule depends on index construction: eligible universe, weighting method, rebalance dates, turnover, costs and treatment of distributions.

The largest company carries a 15% index weight.

A sound review of Index Weight asks whether the rule is transparent, investable and robust to reasonable changes in the sample or definition; a factor can underperform for many years even if its long-run rationale remains intact.

The creation of ETF shares by delivering a basket of securities rather than cash.

Example: A participant transfers the index shares to the fund and receives new ETF units.

In-Kind Creation is the creation of ETF shares by delivering a basket of securities rather than cash; the ETF mechanism is driven by the creation and redemption process, authorised participants, the liquidity of the underlying assets and the ETF's own order book.

A participant transfers the index shares to the fund and receives new ETF units.

For In-Kind Creation, compare the ETF's bid and offer with the latest NAV or indicative value, inspect trading volumeThe number or value of securities traded during a period. and spread, and confirm whether the underlying market is open; the exchange price is the price an ordinary investor can actually trade.

The redemption of ETF shares in exchange for a basket of securities rather than cash.

Example: A participant returns ETF units and receives the underlying securities.

In-Kind Redemption is the redemption of ETF shares in exchange for a basket of securities rather than cash. The market price, indicative asset value and executable bid and offer should be analysed together.

A participant returns ETF units and receives the underlying securities.

For In-Kind Redemption, compare the ETF's bid and offer with the latest NAV or indicative value, inspect trading volume and spread, and confirm whether the underlying market is open. Published NAV may lag a rapidly moving market.

An index designed to measure a market or market segment.

Example: A banking index tracks listed banks.

Market Index is an index designed to measure a market or market segment; separate the rule from the product. The same index or factor can be delivered through a fund, ETF, derivative or separately managed portfolio.

A banking index tracks listed banks.

For Market Index, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. Back-tested performance can be sensitive to data mining and implementation assumptions.

A total-return index that reinvests dividends after assumed withholding taxes.

Example: International investors compare funds with the benchmark's net-return version.

Net-Return Index is a total-return index that reinvests dividends after assumed withholding taxes; the rule uses a stated rule to select, weight, rebalance or measure securities, replacing at least part of discretionary security selection.

International investors compare funds with the benchmark's net-return version.

For Net-Return Index, read the methodology, eligible universe, weighting and rebalance rules; compare live performance with the stated benchmark after fees and trading costs. Rules remove discretion but do not remove investment risk.

An index measuring only price changes and excluding reinvested income.

Example: Dividends are omitted from the price-return index.

Price-Return Index is an index measuring only price changes and excluding reinvested income; the rule describes a systematic exposure, but implementation determines whether an investor receives the theoretical return after fees and trading frictions.

Dividends are omitted from the price-return index.

Before investing through Price-Return Index, identify the economic reason the exposure should earn a return and the conditions under which it is likely to fail; low stated fees do not eliminate turnover or market-impact costs.

Price or trading impact associated with index weight changes.

Example: Funds buy a newly added constituent before the effective date.

Rebalance Effect describes price or trading impact associated with index weight changes; the outcome from the rule depends on index construction: eligible universe, weighting method, rebalance dates, turnover, costs and treatment of distributions.

Funds buy a newly added constituent before the effective date.

Evaluate Rebalance Effect through holdings and exposures rather than the product name; measure concentration, turnover, tracking difference and performance across full cycles. Also compare Index Weight, defined here as a constituent's percentage contribution to an index.

Tracking an index with a representative subset of constituents.

Example: A bond fundA fund that invests mainly in bonds with the aim of earning interest income and possible capital gains. samples securities because the index contains thousands of issues.

Sampling describes tracking an index with a representative subset of constituents; the rule uses a stated rule to select, weight, rebalance or measure securities, replacing at least part of discretionary security selection.

A bond fund samples securities because the index contains thousands of issues.

Before investing through Sampling, identify the economic reason the exposure should earn a return and the conditions under which it is likely to fail; a factor can underperform for many years even if its long-run rationale remains intact.

An index tracking companies in one economic sector.

Example: The banking index rises after strong industryA more specific group of companies with closely related products or services. earnings.

Sector Index is an index tracking companies in one economic sector; separate the rule from the product. The same index or factor can be delivered through a fund, ETF, derivative or separately managed portfolio.

The banking index rises after strong industry earnings.

Before investing through Sector Index, identify the economic reason the exposure should earn a return and the conditions under which it is likely to fail. Also compare Index Tracking, defined here as the process of building a portfolio intended to follow an index's return.

An index measuring price changes plus reinvested distributions.

Example: A total-return index exceeds its price index when constituents pay dividends.

Total-Return Index is an index measuring price changes plus reinvested distributions; separate the rule from the product. The same index or factor can be delivered through a fund, ETF, derivative or separately managed portfolio.

A total-return index exceeds its price index when constituents pay dividends.

Before investing through Total-Return Index, identify the economic reason the exposure should earn a return and the conditions under which it is likely to fail; back-tested performance can be sensitive to data mining and implementation assumptions.