Creation and Redemption Mechanism Definition
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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)
