How is an ETF created

How is an ETF created?

ETF shares are created by a process called creation and redemption, which occurs on exchange once a day in the Primary Market. It allows Authorised Participants  - such as institutional trading desks and other approved market makers - to exchange baskets of securities or cash for ETF shares (and back again) without meaningful impact to the underlying market.

This process can essentially provide unlimited liquidity to the fund. The effective liquidity available to the fund as a whole becomes a function of the trading volumes in its underlying index constituents, as opposed to the secondary market volumes in the ETF’s shares. In this context, the liquidity of an ETF goes further than what can be seen ‘on screen’.

This ability to create and redeem shares at any time keeps an ETF’s price in line with its underlying net asset value and ensures that the liquidity of an ETF derives from the underlying securities held within the fund.

The process is explained in the graphic below: