Creation and redemption mechanisms are essential processes that enable Exchange-Traded Funds (ETFs) to maintain their market price in line with the value of their underlying assets. These mechanisms help ensure liquidity and prevent significant price discrepancies. In the creation process, Authorized Participants (APs)—typically large institutional investors—purchase a basket of the underlying securities that the ETF tracks and exchange them for newly issued ETF shares. Conversely, the redemption process allows APs to return ETF shares to the fund in exchange for the equivalent basket of underlying assets. This dynamic system allows ETFs to adjust their supply as needed, helping to keep their market price closely aligned with the net asset value (NAV) of the securities they represent.
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