Glossary

Plain-language definitions for the 41 terms that come up most often in the index-fund and ETF literature. Skim what's relevant; nothing here is comprehensive.

Fund mechanics

ETF — Exchange-traded fund: An open-end fund whose shares trade on an exchange like a stock. The fund's own creation/redemption is wholesale and in-kind, which is what gives most ETFs their tax-efficiency edge over mutual funds: shareholder trades don't trigger fund-level capital gains.
Mutual fund: An open-end fund whose shares are bought from and sold to the fund itself at end-of-day NAV. The same fund company often offers a mutual fund and an ETF tracking the same index — Vanguard's VTSAX and VTI are the canonical example.
NAV — Net asset value: The total value of a fund's holdings divided by shares outstanding. Mutual funds trade at NAV; ETFs trade close to NAV but can diverge intraday — the gap is the "premium" or "discount."
Premium / discount: The percentage difference between an ETF's market price and its NAV. For widely held funds with active market-making this is typically under 5 basis points; for thinly traded or hard-to-arbitrage funds (international, small-cap, leveraged) it can be larger.
AUM — Assets under management: Total dollar value held by a fund. Higher AUM correlates with tighter bid-ask spreads, more market-making depth, and lower closure risk. The PlainIndex liquidity sub-score is a function of AUM.
Expense ratio: Annual fund-level fee deducted directly from NAV, expressed as a percentage. 3 basis points (0.03%) on a $100,000 holding is $30 per year. The single biggest controllable cost in a passive portfolio.
In-kind redemption: The ETF-specific mechanism where the fund swaps shares for a basket of underlying securities with an authorized participant, rather than selling holdings for cash. Doesn't trigger taxable capital gains at the fund level — this is the structural reason ETFs are typically more tax-efficient than mutual funds.
N-PORT: SEC filing form (Form N-PORT) that registered investment companies submit monthly. Lists every holding with weight, CUSIP/ISIN, and market value. The PlainIndex pipeline reads N-PORT directly from EDGAR to build holdings and overlap data — no paid data feed required.

Cost and tracking

Basis point — bp: One one-hundredth of a percent. The standard unit for quoting expense ratios, yield differences, and small percentage changes. A 3 bp expense ratio is 0.03%; a 100 bp difference is 1.00%. Used because most fund-cost differences fall in the 1–50 bp range, which reads cleaner than "0.01–0.50 percent."
Bid-ask spread: The gap between the highest buy order and lowest sell order on the exchange. A round-trip trade (buy then sell) pays the spread once. Tight spreads on high-AUM funds are 1-2 cents; thin funds can spread 5-20 cents. Effectively an extra layer of cost on top of the expense ratio for active traders.
Tracking error: How closely a fund's return matches its benchmark index, after fees. A perfectly run S&P 500 fund tracks the S&P 500 minus its expense ratio. Tracking error above that gap suggests fund-management drag — securities lending revenue, sampling error in bond funds, foreign-tax leakage, etc.
Securities lending: Practice where the fund lends out its holdings to short-sellers in exchange for a fee. The income offsets the expense ratio at the fund level — a fund can run a 3 bp expense ratio and still post returns equal to its index when sec-lending revenue makes up the difference. Conservative funds (Vanguard) typically lend less than aggressive funds (BlackRock).
Duration: Sensitivity of a bond fund's price to changes in interest rates, expressed in years. A duration of 6 means a 1% rise in rates reduces price by roughly 6%. Aggregate bond funds run 6-year duration; long-Treasury funds run 16+; T-bill funds run under 1. The single most important risk metric for a bond fund.
Total return: Price change plus reinvested distributions. The right metric for comparing fund performance — price-only return ignores the (often substantial) dividend contribution.
CAGR — Compound annual growth rate: The geometric average annual return that would produce the observed cumulative return over a multi-year period. Better than simple-average return for understanding long-run performance because it accounts for compounding.
Max drawdown: The largest peak-to-trough percentage decline over a given period. The standard measure of "how bad did it get?" Useful for stress-testing whether you can stomach an allocation through the next bear market.

Tax and account placement

Qualified dividend: A dividend taxed at the long-term capital gains rate (0/15/20%) rather than the ordinary income rate (up to 37%). To qualify, the underlying stock must meet holding-period requirements and be from a US or treaty-country corporation. Most dividends from broad US equity ETFs are qualified.
Capital gains distribution: When a fund sells holdings at a profit, the gain is passed through to shareholders and taxed even if the shareholder didn't sell anything. ETFs largely avoid this thanks to in-kind redemption; mutual funds often issue meaningful end-of-year distributions.
Tax-loss harvesting (TLH): Selling a fund at a loss and buying a "substantially different" fund with similar exposure, to realize the loss for tax purposes while keeping the market exposure. The standard pair is e.g. VTI ↔ ITOT — different index family, near-identical exposure. The two funds rotate over a 30+ day cycle to avoid the wash-sale rule.
Wash sale: IRS rule that disallows a loss deduction if you buy a "substantially identical" security within 30 days before or after the sale. Trips up sloppy TLH; the rule is the reason TLH partners are chosen to track different indexes rather than the same one.
Foreign tax credit: US tax credit for taxes withheld by foreign governments on dividends from foreign-issuer stocks. Only claimable in a taxable account; in a tax-advantaged account the foreign withholding is simply lost. Often cited as the reason to hold international equity in taxable rather than IRA.
Asset location: The practice of placing tax-inefficient holdings (bonds, REITs, high-turnover funds) in tax-advantaged accounts and tax-efficient holdings (broad equity, total-market funds) in taxable accounts. Distinct from asset allocation, which is about what to hold; asset location is about where.
TIPS — Treasury Inflation-Protected Securities: US Treasury bonds whose principal adjusts with CPI. Real-return is essentially locked in for the life of the bond. The inflation accretion is taxed annually before it's realized, which makes TIPS notably tax-inefficient outside a tax-advantaged account.
Phantom income: Taxable income that hasn't hit your bank account yet. The canonical case is TIPS inflation accretion — the bond's principal grows with CPI each year, and the IRS treats the growth as taxable interest in that year even though you don't receive it until the bond matures. Zero-coupon bonds work the same way. The standard fix is to hold the asset in a tax-advantaged account.
199A deduction: Section 199A of the tax code lets you deduct 20% of qualified REIT dividends from taxable income, reducing the effective tax rate on REIT distributions in a taxable account. Doesn't make REITs tax-efficient — most distributions are still taxed at ordinary income rates — but recovers a meaningful chunk of the drag.

Indexing and factors

Index fund: A fund whose holdings are determined by a published, rules-based index (S&P 500, CRSP US Total Market, FTSE Emerging Markets, etc.) rather than by an active manager's discretion. Lower fees, lower turnover, more predictable behavior than active management.
Market-cap weight: Weighting each holding by its market capitalization (price × shares outstanding). The default for broad index funds — every dollar invested ends up exposed to the market in the same proportion as the overall market.
Smart beta: Index funds with a deliberate non-market-cap weighting scheme — equal weight, fundamental weight, value-weighted, etc. The term is marketing-coined; academically these are factor funds with an index wrapper.
Factor: A characteristic shown to predict cross-sectional stock returns: value, size, momentum, quality, low-volatility, profitability. Factor funds tilt portfolios toward stocks with the chosen characteristic. Returns are real but episodic — factor exposure pays off over multi-year horizons, not month-to-month.
Tilt: Overweighting a factor relative to its market-cap weight. A "small-cap value tilt" overweights small-cap value stocks vs. their market weight; the underlying portfolio is still broadly diversified but skewed toward the tilted exposure.
Reconstitution: When an index updates its membership list — adds, drops, and weight rebalances. Major indexes reconstitute annually (Russell) or quarterly (S&P, MSCI). Funds tracking the index trade in lockstep, which is a known source of "index effect" trading costs.
Turnover: The annual percentage of a fund's holdings that get replaced. Low-turnover funds (broad index, ~5%) realize less in capital gains than high-turnover funds (active, thematic, 50-100%+). Higher turnover correlates with higher tax cost and modestly higher trading costs.
Substantially identical: The IRS test for whether two securities trigger the wash-sale rule. Identical funds (two VTI lots) are clearly substantially identical. Funds tracking the same index are widely considered identical too (VOO ↔ IVV ↔ SPLG all track the S&P 500). Funds tracking different indexes from different vendors are widely considered not substantially identical (VTI/CRSP ↔ ITOT/S&P), which is the legal basis for the standard TLH pair set. The IRS has never tested this definition for ETFs in court.

Portfolios and strategy

Bogleheads: Community organized around the late John Bogle's low-cost passive investing philosophy. The eponymous forum (bogleheads.org) and wiki are the most-cited DIY-investor reference material; the audience PlainIndex is built for.
3-fund portfolio: The canonical Boglehead portfolio: US total market + international total + US aggregate bond. Three holdings cover essentially every diversification benefit available to a passive investor.
Lazy portfolio: Any named set-and-forget allocation (3-fund, Couch Potato, Permanent, Golden Butterfly, All-Weather, Talmud) that uses index funds and is implemented in 3-7 holdings. The point is rebalanceability, not optimality.
Asset allocation: The split between major asset classes (stocks vs. bonds vs. other). The single biggest driver of long-run portfolio behavior — much larger than which specific fund implements each slice.
Rebalancing: Periodically resetting holdings back to target weights. Sells what's grown, buys what's lagged — mechanical, contrarian, and the source of most of a lazy portfolio's long-run return. Done annually or on a threshold (e.g., 5% drift).
Concentration: The share of a fund's value held in its top few names. The PlainIndex concentration sub-score uses top-10 weight as a proxy. A US total-market fund sits around 20-25%; a tech-sector fund around 50-60%; a thematic fund can run 80%+.

Identifiers

CUSIP: A 9-character alphanumeric identifier for US-listed securities, assigned by CGS. Used in N-PORT filings to identify each underlying holding unambiguously. The PlainIndex overlap analyzer matches on CUSIP (with ISIN as fallback) to compute holdings overlap between two funds.
ISIN: A 12-character international securities identifier (country code + national identifier + check digit). Required for foreign-listed securities, which don't have CUSIPs. ISIN is the cross-listed equivalent — US securities have an ISIN that wraps their CUSIP.

Definitions are editorial and condensed for skimmability. For exact regulatory or tax treatment, refer to IRS publications, the SEC glossary, or your tax preparer.

Missing a term you wanted? The glossary grows as the editorial guides and methodology page do — terms move in here when they show up in more than one place on the site.