What causes ETF inflows or outflows?

[ajensen]

I am trying to understand what causes ETF inflows and outflows. Is the following thinking correct?

If an investor wants to exit a big ETF position, he can sell the shares on an exchange or redeem his ETF shares. Suppose the ETF trades at $10. If the intraday NAV is $10.10 he will redeem his ETF shares, get the $10.10 of underlying stocks, and sell those. If the INAV is $9.90 he is better off selling the ETF shares on an exchange. Alternatively, a market-maker may redeem an ETF and sell the stocks when the ETF trades below INAV. So ETFs suffer outflows when someone wants to sell and the ETF is trading below INAV, or when a market-maker wants to arbitrage the spread between the ETF prices and INAV?

 

[Robert Morse]

Customers can't redeem or create shares. If customers sell shares, Market Makers will buy blocks at prices where they can short the basket and redeem the ETF for a profit. This can only be done by Authorized Participants.

https://www.etf.com/etf-education-c...-creationredemption-mechanism.html?nopaging=1

 

[ajensen]

Customers can't redeem or create shares. If customers sell shares, Market Makers will buy blocks at prices where they can short the basket and redeem the ETF for a profit. This can only be done by Authorized Participants.

https://www.etf.com/etf-education-c...-creationredemption-mechanism.html?nopaging=1

Thanks. So a big customer sell could drive an ETF price below INAV. That causes an Authorized Participant, perhaps the one that bought the ETF shares from the customer, to redeem the shares.

 

[Robert Morse]

You sell the ETF, the buy and sell basket short. You buy the ETF, the sell short ETF, and buy the basket. They will only do this is the values make sense.

 

[2rosy]

Thanks. So a big customer sell could drive an ETF price below INAV. That causes an Authorized Participant, perhaps the one that bought the ETF shares from the customer, to redeem the shares.

ideally, the AP would buy the ETF and short the constituents. at the end of the day AP redeems stocks from the ETF provider netting out the shorts. In reality, there's never an arbitrage. If iNAV is way below where the etf is trading probably the constituents are illiquid or something along that. Trading through bloomberg or tradeweb on large blocks is the edge.

 

[murray t turtle]

I am trying to understand what causes ETF inflows and outflows. Is the following thinking correct?

If an investor wants to exit a big ETF position, he can sell the shares on an exchange or redeem his ETF shares. Suppose the ETF trades at $10. If the intraday NAV is $10.10 he will redeem his ETF shares, get the $10.10 of underlying stocks, and sell those. If the INAV is $9.90 he is better off selling the ETF shares on an exchange. Alternatively, a market-maker may redeem an ETF and sell the stocks when the ETF trades below INAV. So ETFs suffer outflows when someone wants to sell and the ETF is trading below INAV, or when a market-maker wants to arbitrage the spread between the ETF prices and INAV?

%%
And in the case of 2008, panic sellers, easy to see on the charts. Most sold @ worst time; but if the bear market/trend had lasted 3 years/+ like 2000,2001,2002, good timing