Learn/Direxion ETF University 1/How Is an ETF Created?

How Is an ETF Created?

Only authorized participants actually buy or sell shares of an ETF directly from or to the fund provider. Here tells the creation process of ETFs.

Only authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from or to the fund provider, and then only in creation units. Creation units are large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets of the underlying securities that match the strategy of the fund.

Authorized participants may wish to invest in the ETF shares long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets.

Other investors, such as individuals using a retail brokerage, trade ETF shares on the secondary market.

The market prices of the shares will fluctuate in response to changes in the value of the underlying index and supply and demand for the ETF shares. Both of these variables can cause the ETF's market prices to trade at, above, or below the fair market value of the underlying securities in the benchmark index. The price above or below market value is known as the ETF's premium or discount.

The following is a step-by-step view of the creation process.

Webull and Direxion are separate and unaffiliated companies, and are not responsible for one another’s policies, services, or opinions. ETFs are subject to risk similar to those of their underlying securities, including, but not limited to, market, investment, sector, or industry risks, and those regarding short-selling and margin account maintenance. Some ETFs may involve international risk, currency risk, commodity risk, leverage risk, credit risk, and interest rate risk. Performance may be affected by risks associated with nondiversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, small-capitalization securities, and commodities. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).