ETFs aren’t simple. This was never simple. You expected a PUMP for pride month and I find that to be an unreasonable expectation being that we just filed our prospectus 2 weeks ago.
The method of creating an ETF starts when an institutional investor provides a basket of specified securities for deposit into the ETF's portfolio. This basket of securities generally includes most or all of the securities underlying the ETF's index. In exchange, the institutional investor receives the equivalent value of the ETF's shares in large lot sizes called "creation units." Thereafter, the institutional investor (known as the "authorized participant," or AP) may hold the shares in creation units, or sell some or all of the individual shares into the secondary market, where they are bought, sold and priced throughout the day on a stock exchange.
When an AP wants to create shares of an ETF, it will buy the requisite number of stocks in the ETF's underlying portfolio on the secondary market (a creation unit is often comprised of the equivalent of 50,000 shares of the ETF). The AP can also redeem its shares directly to the ETF: If it has enough ETF shares on hand, it can tender a creation unit in exchange for the equivalent value of the ETF's portfolio securities (at net asset value, or NAV). Just as it tenders actual shares of individual companies to the ETF "in kind" when creating ETF shares, it receives the actual shares of the underlying ETF portfolio back-again in kind-when redeeming ETF shares.
This method of creating and redeeming shares is commonly called the "creation/redemption process," and it is the key to what makes an ETF an ETF. Retail investors do not participate in the creation/redemption process; rather they buy, hold and sell ETF shares just they way they invest in and trade any other listed stock. Many institutions also trade in shares on the secondary market and do not participate in the creation/redemption process. But the creation/redemption process is the key to the efficiency that keeps the pricing of ETF shares close to the actual value of their underlying portfolios.
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