ETF Creation & Redemption
Exchange-traded fund (ETF) shares may look like stocks in the marketplace, but the way their shares are created is very different. Unlike stock shares, which are finite in number unless the company issues more, ETF shares can be created or removed from the market at any time. The body that creates and redeems shares is called an Authorized Participant, or AP. APs are generally institutional investors.
Shares can be added or removed from the market in large blocks called 'creation units', which are made up of a number of shares specified by the fund company (usually 50,000 shares). When an AP buys a basket of securities that matches the holdings of the ETF, they can bring those shares to the fund company and exchange them for a creation unit, or 50,000 shares of the ETF. Those 50,000 shares of the ETF are then made available in the market for investors.
This process creates hidden liquidity in the market. If investors want to buy shares but there aren't enough available, an AP can exchange shares of stock for a creation unit and provide investors with the shares they want. Likewise, if an investor would like to sell a substantial number of shares of an ETF, an AP can buy those shares, and when they have enough for a creation unit, they can redeem shares of the ETF for shares of the included stocks.
Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds' performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.