Creation/Redemption Mechanism

Creation/Redemption Mechanism

It's how ETF shares are created and redeemed, in a process that’s unique to the ETF structure. (We have a diagram detailing this mechanism here.) When there’s demand for new shares of an ETF, an authorized participant buys the securities the ETF holds, and hands that basket of securities to the ETF issuer in exchange for ETF shares. This is known as an in-kind transaction—securities for shares. In the case of a redemption, this process works in reverse. The in-kind nature of the creation/redemption mechanism is crucial to how ETFs trade because it allows them to trade throughout the day in line with the value of their underlying holdings (their net asset value).