Glossary

Creation and redemption

Creation and redemption is the process in which authorized participants add or remove ETF shares by delivering or receiving the underlying asset or cash.

An ETF does not issue shares on demand to the public. Authorized participants, which are large financial firms, handle this step. In a creation, an authorized participant delivers the underlying asset or cash to the fund and receives new shares. In a redemption, it returns shares and receives the underlying asset or cash.

This process links the ETF share price to the value of the holdings. If the share trades above the value of its holdings, authorized participants can create shares and sell them. If it trades below, they can buy shares and redeem them. These trades push the two prices back together.

Net creations and redemptions are the main source of the daily flow figures for ETFs. A share traded between two investors on an exchange does not change the fund size. Only a creation or a redemption does. Flow data is therefore a net figure, and it can lag the trades by a day.