Creation / redemption
Definition · Level 0 · Market basics
Keep reading with Tradecraft
Without a subscription, you can read three definitions every 30 days. Tradecraft explains all 988 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
How ETF shares are made and destroyed: creation swaps a basket of stocks for new ETF shares; redemption swaps ETF shares back for the basket. It pulls the ETF’s price toward its net asset value.
Example
ETF above its NAV: buy the stocks, create ETF shares, sell them. ETF below its NAV: buy ETF shares, redeem them for the stocks.
Where Tradecraft teaches it
Level 0 · Market basics, in the lesson “ETFs & mutual funds”: Funds you can buy to own an index, and why an ETF’s price stays close to what it holds.
Related terms
- Authorized participantA large dealer allowed to deal directly with an ETF’s issuer: it creates or redeems ETF shares in bulk, which keeps the ETF’s price close to its net…
- ETFExchange-traded fund: a pooled fund whose shares trade all day on an exchange like a stock, usually tracking an index at low cost; creation and…
- Mutual fundA pooled, professionally managed investment vehicle you buy from and sell back to the fund itself once a day, at the net asset value (NAV)…
- NAVNet asset value per share: what a fund owns minus what it owes, divided by its number of shares.
- 52-week high / all-time highThe highest price over the past year of trading / the highest price ever recorded (split-adjusted).
- Account equityWhat you would keep after selling everything in the account and repaying the loan: market value minus what you owe.