Structuring an ETF involves a few steps:
- Creation: An ETF is created by an authorized participant (AP), who is usually a large financial institution. The AP assembles a basket of securities that reflects the composition of the ETF’s target index, and delivers those securities to the ETF issuer in exchange for ETF shares.
- Listing: Once the ETF shares have been created, they are listed on a stock exchange and can be bought and sold by investors just like stocks.
- Trading: The ETF shares trade on the exchange throughout the day at market prices, just like individual stocks.
- Net asset value (NAV): At the end of each trading day, the ETF issuer calculates the net asset value (NAV) of the ETF by adding up the value of all the underlying securities and dividing by the number of outstanding ETF shares. This NAV is then published on the ETF’s website.
- Redemption: If an investor wants to redeem their ETF shares, they can usually do so by delivering them back to the ETF issuer in exchange for the underlying securities in the ETF’s basket.
ETFs can hold a variety of securities, including stocks, bonds, and commodities, and can be designed to track a particular index, sector, or investment strategy. By investing in an ETF, investors get exposure to a diversified portfolio of securities, which can help to reduce risk and provide long-term growth potential.
This page was last updated on March 31, 2023.