Exchange-Traded Funds (ETFs)
Like mutual funds, exchange-traded funds, or ETFs, are a type of pooled investment that contains stocks, bonds, or other financial assets. The assets are usually chosen to track an index. Like closed-end funds, ETFs are not actively managed and ETF shares are usually not redeemable.
An ETF is created by an ETF sponsor, usually an investment company, which selects an underlying index of securities and then receives the securities from a large institutional investor known as an authorized participant. This large investor acquires the securities and delivers them to the ETF sponsor in exchange for a large block of ETF shares, called a creation unit. Creation units usually come in blocks of 50,000 shares but may be smaller or larger. The authorized participant then sells these shares to individual investors in the secondary market.
Suppose, for example, an investment company wants to create an ETF that will track the Russell 2000 Index. The ETF sponsor will file its plan with the SEC. After receiving the SEC’s approval, the sponsor will search for a large institution to act as an authorized participant and deliver the securities needed to track the index. Out of its own inventory or by purchase, the authorized participant will collect shares of all the stocks that compris