Creation

Creation

1. AP buys creation basket of ETF’s underlying securities

2. AP delivers creation basket of securities to ETF

3. AP receives ETF’s underlying securities

4. AP sells ETF’s underlying securities

Q: Why create? A: Fill orders / Create inventory / Take advantage of arbitrage opportunities

Step 1 The Investor places an order to buy ETF shares on the secondary market: • If there are enough shares in the market to satisfy the order, the order is filled. • If there are not enough shares, the creation process is kicked off in the primary market. Step 2 The AP acquires the securities that make up the ETF and delivers them to the ETF sponsor. Step 3 The ETF sponsor creates the ETF shares and delivers them back to the AP as a creation unit. Step 4 The AP delivers the creation unit/ETF shares to the secondary market.

ETF Creation Process

1. John goes to his broker and gives him the order to buy 500,000 shares of an ETF. 2. The broker sells the ETF shares to John at a specific price. As mentioned before, the process of buying the ETF is seamless for John the investor, and his work is done. 3. Behind the scenes on the back end, the broker has determined that, due to the increased demand by John, he as an authorized participant must create new ETF shares. He is now short the ETF shares since he sold them to John. 4. The broker then buys the basket of securities held by the ETF to hedge himself and is now long the basket and short the ETF. 5. The broker then delivers the basket of securities to the ETF issuer, initiating a creation. 6. The broker receives new ETF shares from the issuer in return and flattens out his short ETF position.