If you’re going to be an ETF investor, you need to know the lingo. If you’re not going to be an ETF investor, you can still use the following phrases to impress at dinners at the country club. Please note that any word in italic (except for the word italic) appears as its own entry elsewhere in the glossary.

Active investing.

Ah, to beat the market. Isn’t it every investor’s dream? Through stock picking, ETF picking, market timing, or all three strategies, active investing offers hope of market-beating returns. Alas, it sounds a lot easier than it really is. Compare to passive investing.

Alpha.

Given a certain level of risk, you should expect a certain rate of return. If your stock/fund/portfolio return exceeds that expectation, congratulations! You’ve just achieved what people in the finance world call “positive alpha.” Pass the caviar. If your stock/fund/portfolio return falls shy of that expectation, you are in the dark and depressing land of “negative alpha.” Pass the herring.

Ask price.

The rock-bottom price that any stock or ETF seller is willing to accept. If any buyer is willing to fork over that amount, a sale is made. If no buyers are willing to match the ask price, gravity will eventually start to drag down the price of the stock. Compare to bid price and spread.

Asset class.

To build a diversified portfolio (meaning not having all your eggs in one flimsy straw basket), you want to have your investments spread out among different asset classes. An asset class is any group of similar investments. Examples may include small value stocks, utility stocks, high-yield bonds, Japanese small-company stocks, or Rembrandts (paintings, not the toothpaste).

Beta.

A common measurement of the volatility of an investment. If your ETF has a beta of 1.5, it tends to move up 15 percent whenever the market as a whole (usually represented, somewhat clumsily, by the S&P 500 Index) goes up 10 percent. If the market as a whole goes down 10 percent, your ETF will fall 15 percent. Note that beta is a relative measure of risk, while standard deviation (a generally more useful tool) is an absolute measure of risk.

Bid price.

The highest price that any buyer is willing to spend to purchase shares of a stock or ETF. Compare to ask price and spread.

Buffer (or defined-outcome) ETF.

An ETF that gives you limited exposure to a certain index, such as the S&P 500. You agree to earn less when the market’s up in exchange for the ETF provider offering you some protection when the market’s down. And you pay the ETF provider a handsome fee, whether the market’s up or down.

Cap size.

A less fancy way of saying “market capitalization.” It refers to the size of a company as measured by the total number of stock shares outstanding times the market price of each share. In general, stocks are classified as either large cap (over $10 billion), small cap (under $2 billion), or mid cap (anything in between).

Closed-end fund.

Like a mutual fund or an exchange-traded fund, a closed-end fund pools securities, but it differs from its open-ended cousins in that it rarely creates or redeems new shares. Because of the fixed supply of shares, eager investors who want into the fund may wind up paying a significant premium over the market value of the pooled securities. On the other hand, if investor demand lags, the shares of a closed-end fund could sell for a hefty discount.

Closet index fund.

A mutual fund may call itself actively managed and may charge you a boatload of money, but it may be, in essence, an index fund. Shhhhhh. The manager doesn’t want to come out of the closet, lest they lose their excuse for charging you what they charge you, and be forced to surrender the keys to the Mercedes.

Correlation.

The degree to which two investments — such as two ETFs — move up and down at the same time. A correlation of 1 means that the two investments move up and down together, like the Rockettes. A correlation of –1 means that when one goes up, the other goes down, like two pistons. A correlation of 0 means that there is no correlation between the two, like the price of bananas and whether the Philadelphia Eagles will make the playoffs this year.

Diversification.

The division of your investments into different asset classes with limited correlation. Diversification is good. Very good. ETFs make it easy. Did I already mention that diversification is good?

EAFE index.

EAFE stands for Europe, Australia, and the Far East. This index is often used (incorrectly) to represent foreign stocks. What it really tracks are large-cap stocks of developed foreign nations.

Emerging markets.

This is a common euphemism for countries where most people live on a subsistence level. People who invest in emerging markets hope that these nations (mostly in Africa, South America, and Asia) are, in fact, emerging. No one knows. The fortunes of emerging-market stocks are closely tied to the markets for natural resources. Emerging-market ETFs tend to be rather volatile but offer excellent return possibilities.

Expense ratio.

Sometimes referred to as the “management fee,” this is a yearly bill that you pay to a mutual fund or ETF. The money is taken directly out of your account. The expense ratio for ETFs is usually a lot less than that of mutual funds. If the expense ratio for your entire portfolio is more than 1 percent, you’re paying too much.

Fundamental analysis.

If you’re going to be picking stocks, it makes sense, I suppose, to do some fundamental analysis: an analysis of the company’s profitability both present and future. Just know that fundamental analysis is an awfully fuzzy science. And, ironically, the strongest, fastest-growing companies don’t always make for the most profitable stocks. See value premium.

Growth fund.

A fund that invests in stocks of companies that have been fast-growing and are expected (by fundamental analysts) to continue to be fast-growing. In its day, ExxonMobil was a growth stock. You never know…

Hedging.

If you expect that Asset A may zig, and you purchase Asset B in the hope that it will simultaneously zag, you’ve just hedged your position. A common hedging strategy is to use a short position (selling stock shares you don’t own, but borrow) to offset any potential loss you may suffer by holding a long position (where you buy and hold stock). Hedging reduces risk, but it also tends to mute returns. The term “inflation-hedge” refers to any asset or type of asset, such as commodities, that is expected to appreciate in value in a climate of rising prices.

Indexing.

This term is synonymous with passive investing. Index investing has been around for a good while; ETFs simply make it easier, less expensive, and more tax efficient.

iShares.

The brand name for ETFs issued by BlackRock, the largest purveyor of ETFs in the world. A little more than 35 percent of all money invested in ETFs is invested in iShares. (Vanguard is the second largest, with a 28 percent market share; State Street Global Advisors is third with 14 percent.)

Leverage.

An investment made with borrowed funds is said to be leveraged. A common type of leveraged investment, although usually not thought of as such, is a home purchased with little money down and a big mortgage. Leveraged investments offer great potential for profit or — as many homeowners have found out the hard way in recent years — risk of loss.

Liquidity.

A liquid asset can readily be turned into cash. Examples include money market funds and very short-term bond funds. Illiquid assets are more difficult to turn into cash. The classic example of an illiquid asset is the family home.

Load.

A wad of cash that you need to fork over in order to purchase certain mutual funds. Study after study shows that load funds perform no better than no-load funds, yet people are willing to pay rather huge loads. Go figure. ETFs never charge loads. Gotta love that about them.

Long position.

Securities you buy with the intention of holding them for an extended period of time. See short position.

Modern Portfolio Theory.

A theory stating that a portfolio doesn’t have to be excessively risky, even if its separate components are riskier than skydiving without a parachute. The trick is to fill your portfolio with investments that have low correlation to one another. When one crashes, another soars — or at least hovers.

Passive investing.

You buy an index of stocks (preferably through an ETF), and you hold them. And you hold them. And you hold them. It’s as boring as a game of bingo in which none of the letters called are the ones you need. And yet passive investors beat the pants off most active investors, year in and year out.

Price/earnings (P/E) ratio.

Take a company’s total earnings over the past 12 months and divide that by the number of shares of stock outstanding. The resulting number represents earnings, the lower number in the equation. Price — the upper number — refers to the market price of the stock. The P/E is the most common way in which stocks are identified as either value stocks or growth stocks. High P/E = growth. Low P/E = value.

Qubes.

A nickname for the QQQ, an index that tracks the top 100 companies listed on the NASDAQ stock exchange. QQQ is the ticker for the most popular ETF that tracks the QQQ. For years, the ticker was QQQQ and not QQQ. Why? I don’t knowww.

R squared.

This measurement shows how tightly an investment hugs a certain index. An R squared of .90 means that 90 percent of a fund’s movement is attributable to movement in the index to which it is most similar. For an index fund or ETF, an R squared of 1.00 is usually the goal. For an allegedly actively managed fund, an R squared of 1.00 (or anything higher than .85 or so) means that you have a closet index fund, and you are being ripped off.

REIT (Real Estate Investment Trust) stock/fund.

A stock or fund that invests in a company or companies that make their money in real estate — most often commercial real estate, such as office buildings and shopping malls. REIT funds tend to be interest-rate sensitive and often have limited correlation to other funds.

Risk.

When we investment types talk of risk, we generally mean but one thing: volatility, or the unpredictability of an investment. The higher the risk, the greater the potential return.

Sector investing.

If you break up your stock portfolio into different industry sectors — energy, consumer staples, financials — then you are a sector investor. Another option is style investing.

Sharpe ratio.

A risk-adjusted measure of fund performance. In other words, it measures a fund’s average historical return per unit of risk. The higher the number, the happier you should be.

Short position.

Securities you don’t own, but borrow from a brokerage with the intention of disinvesting (and hopefully making a quick profit), usually within days, perhaps weeks.

Sophisticated investor.

Often mistaken for someone who trades every day and is constantly checking their account balance, or someone who uses charts and graphs and tries to time the markets. In the real world, such “sophisticated” investors rarely do as well as the “dummy” who builds a well-diversified portfolio of low-cost index funds (such as ETFs) and lets it sit undisturbed.

SPDRs.

The name of the brand line for ETFs issued by State Street Global Advisors (SSgA), the third-largest purveyor of ETFs after BlackRock.

Spread.

The difference between the ask price and bid price for a stock or ETF.

Standard deviation.

The most used measure of volatility in the world of investments. The formula is long and complicated with lots of Greek symbols. Suffice to say this: A standard deviation of 5 means that roughly two-thirds of the time, your investment returns will fall within 5 percentage points of the mean. So if your ETF has an historical mean return of 10 percent, two-thirds of the time you can expect to see your returns fall somewhere between 5 percent and 15 percent. If your ETF has an historical mean return of 5 percent, two-thirds of the time you can expect your return to be somewhere between 0 percent and 10 percent.

Style investing.

If you divvy up your stock investments into large, small, value, and growth, you are a style investor, as opposed to a sector investor. Which is better? Hard to say.

Style drift.

It’s 11 p.m. Do you know where your investments are? A manager of an active mutual fund tells you that their fund is, say, a large growth fund. And perhaps it once was. But lately, the manager has been loading up on large value companies. Is the manager a growth investor or a value investor? Only they know for sure. Meanwhile, you get stuck with their style drift and you aren’t sure exactly what you are holding. See transparency.

Tax efficiency.

ETFs are often praised for their tax efficiency. That means the funds generate little in the way of capital gains, so you pay taxes only on dividends until such time as you actually cash out. With many mutual funds, you can wind up paying taxes at the most inopportune moments.

Tax-loss harvesting.

Late in the year (most often), you can sell off a losing investment in order to claim a loss on your taxes. You can usually use tax losses to wipe out capital gains of the same amount. If your losses exceed your gains, you can generally take the loss to wipe out ordinary income, up to $3,000. In effect, Uncle Sam is helping to share the burden of your woes.

Technical analysis.

The use of charts and graphs to try to predict the stock market. Some people take it very, very seriously — despite a lack of any evidence that it works (except for some very small and odd studies from very small and odd places, and even those are equivocal).

Ticker.

The two- to five-letter symbol used for a stock, mutual fund, or ETF. Examples include SPY, QQQ, and EWJ. Some ETF tickers are quite cute. There’s one, for example, called DOG (but none yet with the ticker GOD), which allows you to bet that DOW is going down. There’s another called MOO, which invests in agribusiness.

Transparency.

ETFs are beautifully transparent, which means that you know exactly what stocks or bonds your ETF holds. The same is not always true with mutual funds, hedge funds, or your spouse’s safe deposit box.

Turnover.

The degree to which a fund changes its investments over the course of a year. A turnover rate of 100 means that the fund starts and ends the year with a completely different set of stocks. Turnover generally creates unpleasant tax liabilities for investors. Turnover almost always involves hidden trading costs as well.

Value fund.

A mutual fund or ETF that invests in companies whose recent growth may be less than eye-popping but whose stock prices are believed to be cheap in comparison to the prices of stocks of other like companies.

Value premium.

Over the past century or so, ever since the birth of organized stock markets, value stocks have performed much better than growth stocks, with relatively the same degree of risk. Theories abound, but to date, economists can’t seem to agree on why this apparent value premium exists or whether it is likely to continue.

Volatility.

Whoooeee. What goes up fast often comes down just as fast. A stock or ETF that gained 40 percent last year can lose 40 percent this year. It is volatile. It is risky. It can bring you great joy or great misery. Hope for the former, but be prepared for the latter.

Yield.

A term often used to mean the income derived from an investment over the past 12 months, as a percentage of the total investment. Income may come from dividends (most often the case with stocks or stock ETFs) or interest (from a bond or bond ETF). If you sink $10,000 into an ETF and it generates $500 in yearly income, your yield is 5 percent. If it generates $600, your yield is 6 percent, and so on.

YTD.

Year-to-date return, or the total return (dividends plus any rise in the price of the stock or ETF) from January 1 of the present year until today.