ETFs are traded on stock exchanges like stocks. Unlike stocks, however, they do not get onto the exchange via an initial public offering.
The only investors who can create or redeem new shares of an ETF are a special group of institutional investors called “authorized participants” (APs).
APs are large broker/dealers, often market makers, that are authorized by the issuer to participate in the creation/redemption process.
The AP creates new shares of an ETF by transacting with the ETF manager.
Each day, an ETF manager publishes a list of securities that it wants to own in the fund.
The list of securities specific to each ETF and disclosed publicly each day is called the “creation basket.”
To create new shares, an AP goes out into the market and buys up all the stocks in the creation basket at the right percentages.
These transactions between the AP and the ETF manager occur in large blocks called “creation units,”.
Most investors, large and small, buy ETFs through their brokers, just as they do a stock. The price those investors pay is based entirely on supply and demand—as with a stock.
ETF issuers are required by their exemptive relief from the SEC to contract with third parties to calculate and publish an intraday estimate of the value of an ETF share based on that day’s holdings as disclosed in its creation basket.7 This value is published every 15 seconds and is referred to as the “intraday indicative value,” “intraday NAV” (INAV).