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ETF Basic

ETF Creation/Redemption

Understanding about Creation and Redemption of ETF 

Creation/Redemption Transactions in ETFs involve buying or selling orders from Authorized Participants (APs) and investors. These transactions can be explained as follows:

a. Buying Order of ETFs (Creation):

  • This type of order involves the conversion of composition securities into ETF shares.
  • Authorized Participants (APs) and investors submit a buying order to the Fund, requesting the receipt of Portfolio Creation Baskets (PCFs) and the issuance of creation units.
  • The process includes the exchange of the underlying securities for ETF shares, with the creation units being the standard block of shares.

b. Selling Order of ETF (Redemption):

  • In contrast, a selling order of ETFs pertains to the conversion of ETF fund certificates back into composition securities.
  • APs and investors submit a selling order to the Fund, requesting the return of creation units and providing the PCFs.
  • The process involves redeeming ETF shares for the underlying securities, and the creation units are returned to the Fund.

Creation transactions involve the creation of ETF units by exchanging composition securities, while redemption transactions involve the redemption of ETF units for the underlying composition securities. These processes are crucial for maintaining the balance and liquidity of the ETF in the market.

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