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ETF Dictionary
ETF Redemption
What Does the Redemption of an ETF?
The redemption of an ETF refers to the process of the APs and investors selling their ETF shares back to the fund manager, typically in exchange for the underlying assets of the ETF. This process is the counterpart to the creation of ETF shares. Here’s a breakdown of the detail redemption process:
- 1. Similar to the creation process, APs play a crucial role in the redemption process. These are typically financial institutions or market makers.
- 2. Redemption Unit: Investors, through APs, submit a request to redeem a specific number of ETF shares. This quantity is often referred to as a “redemption unit.”
- 3. In response to the redemption request, the ETF Manager delivers the basket of securities to the AP. This is typically done “in-kind,” meaning the AP receives the actual securities, no cash.
- 4. Payment to Investors: In some cases, the ETF Manager may pay the AP/ Investor with cash or additional securities by the Custodian if there is a difference between the market price of the ETF shares and the net asset value (NAV) of the underlying assets.
The redemption process helps maintain the balance between the market price of the ETF shares and the value of the underlying assets. It also ensures that the number of outstanding ETF shares aligns with market demand. The process is typically efficient and allows for flexibility in managing investment portfolios.