Index Fund and ETF Glossary: 47+ Terms (2026)

Admiral Shares

Vanguard's lower-cost share class for investors who meet the minimum investment threshold (typically $3,000 for index funds). VTSAX and VFIAX are Admiral share classes. Vanguard consolidated most Investor and Admiral class funds in 2018, converting Investor shares to Admiral. Deep dive →

Authorised Participant (AP)

A large institutional broker-dealer (typically a major bank or trading firm) with a contractual agreement with an ETF fund to create and redeem ETF shares in large blocks (creation units, typically 50,000 shares). APs are the mechanism that keeps ETF prices tethered to NAV via arbitrage. Deep dive →

Average Cost Method

A tax lot accounting method where all purchases of the same fund are averaged together for cost basis calculation. The IRS permits this only for mutual funds. ETF shareholders must use specific identification (SpecID) or FIFO. Average cost is simpler but often not optimal for tax purposes.

Basis Point (bp)

One-hundredth of one percent (0.01%). Used to express small differences in expense ratios and yields. VTI's 0.03% ER is '3 basis points'. The gap between VTI (0.03%) and VTSAX (0.04%) is '1 basis point'.

Bid-Ask Spread

The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask) for an ETF on the exchange. Retail investors pay the ask when buying and receive the bid when selling. Mutual funds have no bid-ask spread - they execute at NAV. Deep dive →

Bloomberg US Aggregate Index

The primary benchmark for broad US investment-grade bond market funds (AGG, BND). Covers US Treasury, agency, corporate, and mortgage-backed securities. Often called 'the Agg'.

Capital Gains Distribution

A year-end payment by a fund of realised net capital gains to shareholders. Taxable to shareholders in the year received, even if reinvested. Broad-market index ETFs (VOO, VTI) and Vanguard index mutual funds have paid effectively zero capital gains distributions for 5+ years. Deep dive →

Closed-End Fund (CEF)

A distinct structure from ETFs and mutual funds. CEFs issue a fixed number of shares at IPO and trade on exchanges. Unlike ETFs, CEFs have no creation/redemption mechanism, so they frequently trade at persistent premiums or discounts to NAV. Higher fees, often used for income strategies.

Cost Basis

The original purchase price of a security, used to calculate capital gains or losses when the security is sold. Each purchase (including DRIP reinvestments) creates a new tax lot with its own cost basis and holding period. Tracking cost basis across decades of DRIP purchases is handled automatically by modern brokerages.

Creation Unit

The minimum block of ETF shares an Authorised Participant can create or redeem, typically 50,000 shares. The AP delivers the underlying securities basket to the fund and receives creation units in return (or vice versa in redemption). These are always in-kind transactions at the fund level. Deep dive →

CRSP US Total Market Index

The benchmark tracked by VTI and VTSAX, covering essentially the entire US equity market (approximately 3,800 companies). Maintained by the Center for Research in Security Prices at the University of Chicago. Reconstituted quarterly.

DRIP (Dividend Reinvestment Plan)

An arrangement (at the broker or fund level) to automatically purchase additional shares using dividend distributions. Both ETFs and mutual funds support DRIPs at all major brokerages. Setup is typically one-click. Deep dive →

Eligible Security

A stock or bond held in an ETF's portfolio that qualifies for in-kind creation/redemption transactions with Authorised Participants. Securities that are illiquid or hard to transfer may be settled in cash instead.

Expense Ratio (ER)

The annual cost of owning a fund, expressed as a percentage of assets under management. Deducted daily from the fund's NAV. A 0.03% ER means you pay $30/year on $100,000. Broad-market index fund ERs range from 0.00% (Fidelity ZERO) to 0.12% (VTIAX). Deep dive →

FIFO (First In, First Out)

A tax lot accounting method that assumes the first shares purchased are the first sold. Default method at some brokerages if no specific identification is elected. FIFO is often not optimal for long-term investors who want to harvest losses or defer gains.

Form 1099-B

IRS form issued by brokerages reporting proceeds from securities sales and cost basis. Used to calculate capital gains and losses on your tax return. Box 1a shows proceeds; Box 1e shows cost basis; Box 1b indicates holding period.

Form 1099-DIV

IRS form issued by funds and brokerages reporting dividends and distributions. Box 1a: total ordinary dividends. Box 1b: qualified portion. Box 2a: capital gain distributions. Box 7: foreign taxes paid (for international funds). Box 2b: unrecaptured Section 1250 gain (REITs). Deep dive →

Foreign Tax Credit (FTC)

A US tax credit for foreign taxes withheld on international investment income. Funds holding >50% foreign securities can pass through foreign taxes paid to shareholders on Form 1099-DIV Box 7. Lost if fund is held inside an IRA or 401(k). Deep dive →

Glide Path

The allocation trajectory of a target-date fund, shifting from growth-oriented (mostly equity) to income-oriented (mostly bonds) as the target date approaches. A 2055 target-date fund might hold 90% equity and 10% bonds today, gliding toward 50/50 by 2055.

HIFO (Highest In, First Out)

A tax lot method that sells the highest-cost lots first, minimising taxable gains (or maximising deductible losses). Must be elected by the investor and specifically identified at the time of sale. Often the most tax-efficient method for a taxable account.

Index Fund

A fund (ETF or mutual fund) that passively tracks the performance of a market index rather than trying to outperform it via active stock selection. Typically lower cost and more tax-efficient than actively managed funds.

In-Kind Redemption

Settlement of ETF redemptions via delivery of the underlying securities basket (not cash). Under IRC Section 852, this is non-taxable at the fund level. The fund picks which tax lots to deliver, preferring highest-basis lots to flush unrealised gains. Core mechanism of ETF tax efficiency. Deep dive →

IRC Section 852

The US Internal Revenue Code section governing regulated investment companies (mutual funds and ETFs). Subsections related to in-kind redemption specify that exchange of ETF shares for the underlying securities portfolio is non-taxable at the fund level, enabling ETF tax efficiency.

IRC Section 851

The RIC (Regulated Investment Company) qualification rules. A fund must meet diversification and income requirements to qualify as a RIC and receive pass-through tax treatment. ETFs and mutual funds both qualify as RICs.

Market Order

An order to buy or sell at the current best available price immediately. For highly liquid ETFs (VOO, VTI, SPY), market orders are generally safe. For less-liquid ETFs, a market order may execute at an unfavourable spread. Mutual fund orders are always effectively market orders - you receive the day's NAV.

Mutual Fund

An open-end investment company that pools money from many investors to invest in securities. Priced once daily at NAV. Includes both actively managed and index funds. Redeemable directly from the fund company at NAV.

NAV (Net Asset Value)

Per-share value of a fund's holdings. Calculated at market close each business day by summing the closing prices of all holdings, adding accrued income, subtracting liabilities, and dividing by shares outstanding. Mutual funds execute trades at NAV. ETFs trade at market price (which should be close to NAV). Deep dive →

Open-End Fund

A fund that continuously issues and redeems shares at NAV. Both mutual funds and ETFs are open-end funds (though ETFs have a secondary market). Contrasted with closed-end funds (fixed share count, trades at premium/discount to NAV).

Ordinary Dividend

A dividend that does not qualify for long-term capital gains tax treatment. Taxed at the investor's ordinary income rate. Bond fund distributions are ordinary dividends. REIT distributions are mostly ordinary (though Section 199A deduction applies).

Premium/Discount to NAV

The difference between an ETF's market price and its NAV. When price > NAV, the ETF trades at a premium; when price < NAV, at a discount. Normally within 5 bps for liquid US equity ETFs, but can be larger for international or bond ETFs during stressed markets. Deep dive →

Qualified Dividend

A dividend eligible for long-term capital gains tax rates (0%, 15%, or 20%). To be qualified, the dividend must be paid by a US corporation (or qualified foreign corporation) and the fund must meet minimum holding-period requirements. Most broad-market US equity fund dividends are qualified. Deep dive →

Sampling

A portfolio construction technique where a fund holds a representative subset of the index rather than every security. Used by some mutual funds (FXAIX tracks S&P 500 via sampling) and ETFs for very broad or illiquid indices. Results in slight tracking error relative to the full-replication approach.

S&P 500 Index

A float-adjusted market-cap-weighted index of 500 large US companies. Maintained by S&P Dow Jones Indices. Reconstituted quarterly. Tracked by VOO, VFIAX, IVV, FXAIX, SWPPX, and SPY.

SEC Exemption

Permission from the US Securities and Exchange Commission to operate an investment company structure that deviates from standard Investment Company Act of 1940 rules. Vanguard's dual share-class structure required (and received) SEC exemption. DFA received similar exemption in November 2024 after Vanguard's patent expired. Deep dive →

Specific Identification (SpecID)

A tax lot method where the investor selects which specific shares to sell, identifying them by purchase date and price. Allows most precise control over realised gains/losses. Must be designated at the time of sale, not retrospectively. Required for ETF shareholders (average cost is not available).

SPY (SPDR S&P 500 ETF Trust)

The oldest US ETF (launched January 1993). Tracks the S&P 500. Charges 0.0945% ER - more than three times VOO's 0.03%. Structured as a Unit Investment Trust (UIT), which cannot internally reinvest dividends. Best for institutional traders and options strategies; not ideal for long-term retail investors. Deep dive →

T+1 Settlement

Securities trades in the US settle one business day after execution as of May 2024 (reduced from T+2). This applies to ETF trades on the secondary market. Mutual fund redemptions typically settle one business day after the NAV is calculated.

Target-Date Fund

A mutual fund or ETF-of-ETFs designed for investors targeting a specific retirement year. Automatically rebalances from growth-oriented (mostly equity) to income-oriented (mostly bonds) as the target date approaches. VFFVX (Vanguard Target 2055), FDEWX (Fidelity Freedom Index 2055).

Tax-Loss Harvesting

A strategy of selling securities at a loss to offset capital gains elsewhere in the portfolio, reducing taxable income. Must watch for wash-sale rules: repurchasing the same or substantially identical security within 30 days (before or after the sale) disallows the loss.

Tracking Error

The annualised standard deviation of the difference between a fund's returns and its benchmark index. Zero is perfect replication. Index funds aim for low tracking error. ETF tracking errors are often below 5 bps for liquid broad-market ETFs.

UIT (Unit Investment Trust)

A specific investment structure used by SPY and a few other older ETFs. UITs issue a fixed number of units at inception and cannot issue new shares continuously. They cannot internally reinvest dividends (cash accumulates until quarterly distribution) and cannot lend securities. Less efficient for long-term investors than the modern open-end ETF structure. Deep dive →

Vanguard Patent (US 6,879,964)

Patent filed 2001, granted 2005, expired 16 May 2023. Covered the concept of a single open-end investment company issuing both conventional mutual fund shares and exchange-traded shares backed by the same portfolio. Enabled VTSAX and VTI (and VFIAX and VOO) to share assets, giving Vanguard mutual fund holders ETF-level tax efficiency for 20+ years. Deep dive →

Wash Sale

An IRS rule (Section 1091) disallowing a capital loss if the same or substantially identical security is purchased within 30 days before or after the sale. Applies to tax-loss harvesting. DRIP purchases can trigger wash sales if done near the loss-sale date. ETF-to-ETF swaps (e.g. VOO to IVV) are often structured to avoid the substantially-identical issue.

401(k)

A workplace retirement plan offering pre-tax contributions (Traditional) or after-tax contributions (Roth 401k). Contribution limits for 2026: $23,500 plus $7,500 catch-up for age 50+. Most 401(k) plans offer only mutual funds; ETFs are rare except via brokerage windows. Deep dive →

403(b)

A retirement plan available to public education employees and non-profit workers. Similar structure to 401(k) but often includes annuity options. Index fund availability depends on the plan provider. See 403bvs401k.com for full comparison. Deep dive →

Roth IRA

An individual retirement account funded with after-tax dollars. Qualified distributions are tax-free. Contribution limit for 2026: $7,000 plus $1,000 catch-up for age 50+. Both ETFs and mutual funds are allowed inside a Roth IRA. The ETF tax-efficiency advantage is irrelevant here. Deep dive →

HSA (Health Savings Account)

A triple-tax-advantaged account for those with a high-deductible health plan (HDHP). Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. If invested (rather than held in cash), behaves like a tax-advantaged brokerage account. Deep dive →