Portfolio Construction with ETFs
Expert-defined terms from the Professional Certificate in Introduction to ETFs (Exchange-Traded Funds) course at London School of Planning and Management. Free to read, free to share, paired with a professional course.
Active Management refers to a portfolio construction approach where the m… #
Related terms include Passive Management, Index Investing, and Enhanced Indexing. Active management is often used in conjunction with ETFs to provide investors with a range of investment options.
Alpha is a measure of a portfolio or investment's excess return relative… #
Related terms include Beta, Sharpe Ratio, and Information Ratio. Alpha is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the performance of their investments.
Arbitrage is the practice of taking advantage of price differences between two o… #
Related terms include Market Efficiency, Price Discovery, and Risk Arbitrage. Arbitrage is an important concept in portfolio construction with ETFs, as it helps to maintain the stability of the market.
Asset Allocation is the process of dividing a portfolio among different a… #
Related terms include Diversification, Risk Management, and Portfolio Optimization. Asset allocation is a critical component of portfolio construction with ETFs, as it helps investors to manage risk and achieve their investment goals.
Backtesting is the process of evaluating a trading strategy or investment… #
Related terms include Simulation, Modeling, and Walk-Forward Optimization. Backtesting is an important tool in portfolio construction with ETFs, as it helps investors to evaluate the potential performance of their investments.
Beta is a measure of a security or portfolio's volatility relative to its… #
Related terms include Alpha, Sharpe Ratio, and Standard Deviation. Beta is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the risk of their investments.
Bid #
Ask Spread is the difference between the bid price and the ask price of a security, such as an ETF, it represents the cost of buying or selling the security, and is an important consideration in portfolio construction, as it can affect the overall cost of the portfolio. Related terms include Trading Costs, Slippage, and Market Impact. Bid-ask spread is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the costs of their investments.
Capital Asset Pricing Model (CAPM) is a theoretical framework that descri… #
Related terms include Beta, Alpha, and Efficient Frontier. CAPM is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the expected return of their investments.
Collateralized Loan Obligation (CLO) is a type of security that represent… #
Related terms include Asset-Backed Security, Mortgage-Backed Security, and Collateralized Debt Obligation. CLOs are an important component of portfolio construction with ETFs, as they provide investors with access to a range of credit assets.
Commodity is a type of asset that is interchangeable with other assets of… #
Related terms include Commodity Index, Commodity Pool, and Commodity Trading Advisor. Commodities are an important component of portfolio construction with ETFs, as they provide investors with access to a range of asset classes.
Commodity Index is a benchmark that tracks the performance of a range of… #
Related terms include Commodity Pool, Commodity Trading Advisor, and Commodity Exchange. Commodity indices are an important component of portfolio construction with ETFs, as they provide investors with access to a range of asset classes.
Correlation is a measure of the relationship between two or more varia… #
Related terms include Covariance, Variance, and Standard Deviation. Correlation is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the diversification benefits of their investments.
Country Risk is the risk that a country's economic or political condition… #
Related terms include Sovereign Risk, Currency Risk, and Emerging Market Risk. Country risk is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the risks of their investments.
Currency Risk is the risk that changes in exchange rates will negatively… #
Related terms include Exchange Rate Risk, Foreign Exchange Risk, and Currency Hedging. Currency risk is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the risks of their investments.
Derivative is a type of security that derives its value from an underlyin… #
Related terms include Option, Future, and Swap. Derivatives are an important component of portfolio construction with ETFs, as they provide investors with access to a range of asset classes.
Diversification is the process of combining different assets or investmen… #
Related terms include Asset Allocation, Risk Management, and Portfolio Optimization. Diversification is a critical component of portfolio construction with ETFs, as it helps investors to manage risk and achieve their investment goals.
Efficient Frontier is a theoretical concept that describes the optimal po… #
Related terms include Capital Asset Pricing Model, Beta, and Alpha. Efficient frontier is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential returns and risks of their investments.
Emerging Market is a country or region that is experiencing rapid economi… #
Related terms include Developing Country, Frontier Market, and Emerging Market Fund. Emerging markets are an important component of portfolio construction with ETFs, as they provide investors with access to new and potentially high-growth investment opportunities.
Exchange #
Traded Fund (ETF) is a type of investment that is traded on a stock exchange, like individual stocks, ETFs are often used to provide exposure to a range of asset classes, and to track the performance of a particular index or sector. Related terms include Index Fund, Mutual Fund, and Exchange-Traded Note. ETFs are a critical component of portfolio construction, as they provide investors with access to a range of asset classes.
Fixed Income is a type of investment that provides a regular income strea… #
Related terms include Bond, Dividend, and Interest Rate. Fixed income investments are an important component of portfolio construction with ETFs, as they provide investors with a regular income stream.
Fundamental Analysis is a method of evaluating a company's or investment'… #
Related terms include Technical Analysis, Quantitative Analysis, and Qualitative Analysis. Fundamental analysis is an important tool in portfolio construction with ETFs, as it helps investors to evaluate the potential of individual investments.
Hedging is a strategy used to reduce or manage risk, by taking a position… #
Related terms include Risk Management, Derivative, and Option. Hedging is an important concept in portfolio construction with ETFs, as it helps investors to manage risk and protect against potential losses.
Index is a benchmark that tracks the performance of a particular asset cl… #
Related terms include Index Fund, Exchange-Traded Fund, and Benchmark. Indices are an important component of portfolio construction with ETFs, as they provide investors with access to a range of asset classes.
Information Ratio is a measure of a portfolio's excess return relative to… #
Related terms include Alpha, Beta, and Sharpe Ratio. Information ratio is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the performance of their investments.
Interest Rate is the rate at which interest is paid on a loan or investme… #
Related terms include Yield, Coupon Rate, and Discount Rate. Interest rates are an important component of portfolio construction with ETFs, as they affect the value of bonds and other fixed-income investments.
Investment Objective is a statement that outlines the goals and constrain… #
Related terms include Risk Tolerance, Return Objective, and Investment Strategy. Investment objectives are an important component of portfolio construction with ETFs, as they guide the selection of investments and the management of the portfolio.
Leverage is the use of debt to finance an investment, such as a margin lo… #
Related terms include Margin, Derivative, and Risk Management. Leverage is an important concept in portfolio construction with ETFs, as it can amplify the potential returns of an investment, but also increases the risk of loss.
Liquidity is the ability to buy or sell a security quickly and at a fair… #
Related terms include Market Depth, Bid-Ask Spread, and Trading Volume. Liquidity is an important component of portfolio construction with ETFs, as it affects the ability to enter or exit a position.
Market Risk is the risk that a portfolio's value will decline due to chan… #
Related terms include Systematic Risk, Unsystematic Risk, and Beta. Market risk is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential risks of their investments.
Mean #
Variance Optimization is a method of portfolio optimization that involves minimizing the variance of a portfolio, subject to a given expected return, mean-variance optimization is often used in portfolio construction to identify the optimal portfolio that meets the investor's investment objectives. Related terms include Efficient Frontier, Capital Asset Pricing Model, and Risk Management. Mean-variance optimization is an important tool in portfolio construction with ETFs, as it helps investors to identify the optimal portfolio that meets their investment objectives.
Modern Portfolio Theory (MPT) is a theoretical framework that describes t… #
Related terms include Efficient Frontier, Capital Asset Pricing Model, and Diversification. MPT is an important concept in portfolio construction with ETFs, as it helps investors to construct an optimal portfolio that meets their investment objectives.
Momentum is a strategy that involves investing in assets that have perfor… #
Related terms include Trend Following, Mean Reversion, and Risk Management. Momentum is an important concept in portfolio construction with ETFs, as it helps investors to identify potentially high-growth investments.
Option is a type of security that gives the holder the right, but not the… #
Related terms include Call Option, Put Option, and Derivative. Options are an important component of portfolio construction with ETFs, as they provide investors with access to a range of asset classes.
Passive Management is a strategy that involves investing in a portfolio t… #
Related terms include Active Management, Index Investing, and ETF. Passive management is an important concept in portfolio construction with ETFs, as it provides a low-cost and efficient way to invest in a range of asset classes.
Portfolio Optimization is the process of constructing a portfolio that me… #
Related terms include Mean-Variance Optimization, Efficient Frontier, and Risk Management. Portfolio optimization is an important tool in portfolio construction with ETFs, as it helps investors to identify the optimal portfolio that meets their investment objectives.
Portfolio Rebalancing is the process of adjusting a portfolio to maintain… #
Portfolio rebalancing is an important concept in portfolio construction with ETFs, as it helps investors to manage risk and maintain the optimal portfolio.
Return on Investment (ROI) is a measure of the return generated by an inv… #
Related terms include Return on Equity, Return on Assets, and Internal Rate of Return. ROI is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the performance of their investments.
Risk Management is the process of identifying, assessing, and mitigating… #
Related terms include Hedging, Diversification, and Portfolio Optimization. Risk management is an important concept in portfolio construction with ETFs, as it helps investors to manage risk and protect against potential losses.
Sector Rotation is a strategy that involves investing in different sector… #
Related terms include Industry Rotation, Style Rotation, and Risk Management. Sector rotation is an important concept in portfolio construction with ETFs, as it helps investors to identify potentially high-growth investments.
Sharpe Ratio is a measure of a portfolio's excess return relative to its… #
Related terms include Alpha, Beta, and Information Ratio. Sharpe ratio is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the performance of their investments.
Style Box is a framework that categorizes investments into different styl… #
Related terms include Style Rotation, Sector Rotation, and Risk Management. Style box is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential risks and returns of an investment.
Swing Trading is a strategy that involves holding a position for a short… #
Related terms include Day Trading, Trend Following, and Risk Management. Swing trading is an important concept in portfolio construction with ETFs, as it helps investors to identify potentially high-growth investments.
Tax Efficiency is the ability of a portfolio to minimize tax liabilities,… #
Related terms include Tax Loss Harvesting, Tax-Deferred Account, and After-Tax Return. Tax efficiency is an important concept in portfolio construction with ETFs, as it helps investors to minimize tax liabilities and maximize returns.
Tracking Error is a measure of the difference between a portfolio's retur… #
Related terms include Information Ratio, Sharpe Ratio, and Alpha. Tracking error is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the performance of their investments.
Value at Risk (VaR) is a measure of the potential loss of a portfolio, ov… #
Related terms include Expected Shortfall, Conditional Value at Risk, and Risk Management. VaR is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential risks of their investments.
Volatility is a measure of the uncertainty or risk of a security or portf… #
Related terms include Standard Deviation, Beta, and Risk Management. Volatility is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential risks and returns of an investment.
Weighted Average Market Capitalization (WAMC) is a measure of the average… #
Related terms include Market Capitalization, Average Market Capitalization, and Portfolio Optimization. WAMC is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential risks and returns of a portfolio.
Yield is the return on an investment, expressed as a percentage of its pr… #
Related terms include Interest Rate, Dividend Yield, and Return on Investment. Yield is an important concept in portfolio construction with ETFs, as it helps investors to evaluate the potential income of an investment.
Zero #
Coupon Bond is a type of bond that does not make regular interest payments, but instead pays the face value at maturity, zero-coupon bonds are often used in ETFs to provide a low-risk investment option, and to manage risk. Related terms include Strip Bond, Discount Bond, and Treasury Bill. Zero-coupon bonds are an important component of portfolio construction with ETFs, as they provide a low-risk investment option.