Arbitrage

PREMIUM=CREATE+SELL

-buy underlying basket

-deliver underlying basket to ETF

-receive ETF shares

-sell etf shares

DISCOUNT=BUY+REDEEM

-buy etf shares

-deliver etf shares

-receive underlying basket

-sell underlying basket

Maintaining fair value through arbitrage

Arbitrage is a profit opportunity that helps ensure an ETF’s share price in the secondary market remains tightly correlated to the value of the securities held in the ETF portfolio. To the extent that an ETF’s share price strays from the fair value of its portfolio securities, APs will “arbitrage” the difference.

If the market price of the ETF is above its NAV, an AP could purchase the underlying basket of securities and short-sell¹ the ETF. Later the AP will execute a creation event, with the new ETF shares covering the short-sell position. The opposite occurs when the market price of the ETF is below its NAV. In this case, the AP would buy the ETF and short-sell the underlying basket of securities, and later execute a redemption event to cover the short position in the underlying basket.