Example of an ETF created with ten different assets, and showing how the calculation is done.

Let’s say that we want to create an ETF that tracks the performance of 10 stocks. We’ll call this ETF the XYZ ETF, and it will have 1,000,000 shares outstanding.

Here’s a hypothetical breakdown of the assets in the XYZ ETF, along with their market values:

StockTickerSharesMarket Value

To create the XYZ ETF, the authorized participant (AP) will assemble a basket of these securities in the same proportions as the table above. Let’s assume that the current market value of the entire basket of securities is $6,000,000.

The AP will then deliver this basket of securities to the ETF issuer in exchange for 1,000,000 shares of the XYZ ETF. This means that each share of the XYZ ETF represents a proportional interest in the basket of securities.

The ETF issuer will calculate the net asset value (NAV) of the XYZ ETF at the end of each trading day by adding up the market values of all the underlying securities and dividing by the number of outstanding ETF shares. For example, if the market value of the underlying securities at the end of the day is $6,100,000 and there are 1,000,000 shares outstanding, then the NAV per share would be $6.10.

Investors can buy and sell shares of the XYZ ETF on a stock exchange throughout the trading day at market prices, which are determined by supply and demand. If an investor wants to redeem their shares of the XYZ ETF, they can do so by delivering them back to the ETF issuer in exchange for the underlying securities in the ETF’s basket.

This page was last updated on March 20, 2024.

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