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        From Sectors and Smart Beta to Fixed Income, SPDR Exchange Traded Funds (ETFs) give you wide access to diverse investment opportunities. Find out more.

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        ETF Education

        How ETFs are Created and Redeemed

        ETFs benefit from a unique process called creation/redemption. In essence creation involves the buying of all the underlying securities and wrapping them into the exchange traded fund structure. Whereas, redemption is the process whereby the ETF is ‘unwrapped’ back into the individual securities.

        ETF Creation/Redemption Process

        The ETF creation and redemption process takes place in the primary market between the ETF issuer and authorised participants (APs). APs are entities chosen by an ETF issuer to undertake the responsibility of obtaining the underlying assets needed to create an ETF. Authorised participants can be large institutional organisations or market makers.

        Creation

        Authorised participants create ETF shares in large increments—known as creation units—by assembling the underlying securities of the fund in their appropriate weightings to reach creation unit size. The AP then delivers those securities to the ETF issuer (like us at SPDR ETFs).

        In return, the ETF issuer bundles the securities into the ETF wrapper, and delivers the ETF shares to the AP. These newly created ETF shares are then introduced to the secondary market, where they are traded between buyers and sellers through the exchange.

        When demand increases, more ETF shares can be created using this process. In effect, this allows the liquidity of an ETF’s underlying securities to enhance the liquidity of the ETF itself.

        Redemption

        APs can also redeem ETF shares by reversing this process. Large increments of ETF shares—known as redemption units—are collected in the secondary market and then delivered to the ETF issuer in exchange for the underlying securities in the appropriate weighting equaling that redemption unit

        As redemption is the opposite process to creation, when demand decreases, the ETF can be dissembled back into single securities.

        As a result of the creation/redemption process, the ETF’s portfolio manager typically does not need to buy or sell securities except for rebalancing purposes.

        ETF creation and redemption process

        Benefits of the Creation/Redemption Process

        The creation and redemption process may seem complicated, but it is one of the mechanisms that drives ETFs’ potential benefits.

        • Premium/Discount: Because of the creation/redemption process, APs are always closely monitoring the demand for ETFs, and then buying or selling shares in response. By adding or subtracting ETF shares from the market, APs work to keep an ETF’s share price closely aligned with the value of the assets held in the portfolio, mitigating outsized premiums or discounts of the ETF market price to the ETF net asset value (NAV).
        • Liquidity: In addition, creation/redemption creates two layers of liquidity within an ETF. There’s a layer of available liquidity in the secondary market and a layer of liquidity of the underlying securities. This is why ETF trading volume is not an all-encompassing measure of the fund’s overall liquidity. To understand the full liquidity of an ETF, investors must also consider the liquidity of its underlying securities.

        Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL").  Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com. 

         

        SSGA, ASL is the Responsible Entity and the issuer for the State Street Managed Funds, which are unquoted, and the SPDR® ETFs which are quoted on the AQUA market of the ASX or listed on the ASX. SSGA ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") created over interests in the SPDR® S&P 500® ETF Trust (“SPY”) which were first quoted on the AQUA market of the ASX on 13 Oct 2014. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY".

         

        This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure statement, available at ssga.com, before deciding whether to acquire or continue to hold the Funds. Target Market Determinations can also be found at ssga.com.  This material should not be considered a solicitation to buy or sell a financial product or security. 

         

        Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss.

         

        Risk associated with equity investing includes stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

         

        ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.  

         

        SPDR®, Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC, ASX® is a registered trademark of the ASX Operations Pty Ltd], these trademarks have been licensed for use by S&P Dow Jones Indices LLC and licensed for use for certain purposes by State Street. MSCI indexes are the exclusive property of MSCI Inc.(“MSCI”). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by State Street.  The products referenced herein are not sponsored, endorsed, sold or promoted by any of these third party entities and none of these entities bear any liability with respect to the products or make any representation, warranty or condition regarding the advisability of buying, selling or holding any products issued by SSGA, ASL.

         

        There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

         

        The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA ASL’s express written consent.

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