How do funds create more shares?

You are absolutely right. I'm playing very loose with words; I was trying to emphasize the point that etf share creation isn't like open ended funds.

Anyway, six months ago I saw double digit discounts. I trade fixed income institutionally for a living so I know when an esoteric group of instruments (like capital hybrid preferred for financials and utilities) were beaten down; There are fairly large etfs on this sort of stuff; and they were pretty heavily discounted (although the true NAV is impossible to calculate anyway).

Quote from black diamond:


Sjfan- this definitely not a normal share issuance. BTW, it sounds like you have watched these in the market, how big are the premiums and discounts you see? I know it can get into the double digits with closed end funds, I assumed it was very small with ETFs based on what I have heard but never looked.
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While a good rule of thumb, the last 80 years worth securities litigation makes this pretty untrue.

Quote from science_trader:

Whatever you buy, whatever you are told, the prospectus is the only single legal document. All the rest just does not exist.
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Always read the prospectus.

It's hard work, but thanks to the litigious society we have, everything is usually in there.

To get anything more, you usually have to perform even harder work or have privileged access.

ETF creation is *completely different* from a normal capital markets process for an open or close end fund and it is all described in the prospectus.
 
Quote from jedwards:

Just a newbie question, but for example, how does an ETF like FAZ, FAS or UNG create new shares?

From what I gather, the price of the ETF is always reflected by the price of the underlying index, not by the buy-sell demand of the people who are trading the stock.

So how does that work? Does the ETF create and destroy shares on the fly? How do they get the underlying futures contracts of shares so quickly in order to handle this? Is there some place that has that kind of info that describes this?

Thanks in advance!
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When there's more demand for their shares, they sell the shares to the public; then with the preceeds they buy sell the shares/futures/swaps/etc needed to track their underlying.

It's an instant process.
Google about ETF liquidity myths.
 
The prospectus for an ETF such as SPY spells out the process for an investor to turn over the underlying shares for ETF shares thus creating new marketable shares. This can be done at any time by any investor. The trustee simply holds all of the underlying shares on behalf of the ETF.
 
shares are created/redeemed on the fly by market makers during the day and then the MM's will square up with the fund at the end of the day. Shares are created/redeemed from the fund in blocks called creation units (in the case of FAS/FAZ it's a 50k share block) and this is done on a daily basis.

These are EXACTLY like open-ended mutual funds, with intra-day liquidity. They are even 40 Act funds. Only Authorized Participants can create or redeem from the fund so you would need to go through a Market Maker or AP to buy/sell direct in large blocks.

The prospectus outlines this - it's all there and explained well. Please read the prospectus before you invest in any ETF.
 
If there's a disrepency between the ETF and the underlying stocks represented, money usually moves in pretty quickly to neutralize the differences.

For example, if someone wanted to buy a bunch of housing holders, and kept buying and buying and started to push it much higher than the parts, people would start selling the holder and neutralizing their position with some of the underlying stocks or the options. Market makers are pretty good at spotting opportunities. So you may get one or two trades past em, but after a couple, they'll be the first ones in line to get a cut of any opportunity too

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