The creation / redemption process

The creation/redemption process

The creation/redemption process allows the ETF issuer to work with an AP to create and redeem the ETF’s underlying fund holdings in the primary market to meet investor demand to buy or sell ETF shares in the secondary market.

The creation/redemption process allows the number of ETF shares to increase or decrease as needed, depending on market demand.

Creation process:
Increases the number of ETF shares to meet market demand

An AP asks the ETF issuer to create new shares. The AP typically delivers a portion of an ETF issuer’s prescribed basket of securities in exchange for more shares of the ETF, which can then be sold in the secondary market to meet demand.

Redemption process: Decreases the number of ETF shares in response to market demand

An AP requests to redeem ETF shares from the issuer who then delivers individual holdings from the fund to the AP to sell in the secondary market. The redemption process allows the ETF issuer to use in-kind trades (instead of selling fund holdings) to handle redemptions. This process is non-taxable and can help reduce the potential for capital gain realization in the ETF on account of investor activity. The creation and redemption process enhances the vehicle’s tax efficiency.