Creation and Redemption Mechanism Definition

Creation and Redemption Mechanism Definition

Learn the definition of contango and other ETF terminology from the etf.com glossary.

ETF
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Reviewed by: etf.com Staff
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Edited by: etf.com Staff

Learn more about Creation and Redemption Mechanism

The Creation and Redemption Mechanism is a fundamental process in Exchange-Traded Funds (ETFs) that allows for the efficient creation or redemption of ETF shares. Authorized Participants (APs), typically large financial institutions, can create new ETF shares by delivering a basket of underlying assets to the ETF issuer. Conversely, they can redeem shares by exchanging them for the underlying assets. This mechanism helps keep the ETF's market price in line with its net asset value (NAV). By adjusting the supply of shares based on investor demand, the process enhances liquidity and ensures the ETF's market price closely tracks the value of its underlying assets.

Related Terms

Authorized Participant (AP), Bid/Ask Spread, Custom Basket, Net Asset Value (NAV)

ETF Glossary is etf.com’s collection of key terms and definitions related to exchange-traded funds. ETFs are investment funds that are traded on stock exchanges, and they can encompass a wide range of asset classes, including stocks, bonds, commodities and more. Given the diverse range of ETFs and the complexity of financial markets, having a clear understanding of ETF-related terminology is instrumental for investors looking to make informed decisions, manage risks effectively and navigate the evolving landscape of ETF investments.