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How ETFs are Created



New Exchange Traded Funds (ETFs) are created when designated brokers buy the basket of securities underlying the index and exchange them with the ETF provider for newly created ETF shares. Creation units are large blocks of ETF shares, usually 100,000 or 200,000 shares per unit. The designated broker will then break up the creation units into individual ETF shares which trade on a stock exchange and can be purchased by individual investors.

The reverse process occurs when the designated broker redeems a creation unit. The broker purchases ETF shares on the open market to form the quantity needed for one creation unit (i.e. – 100,000 or 200,000 shares as in the example above), and then turns the shares over to the ETF provider in exchange for the individual securities underlying the ETF.

Through the creation process, shares move from the ETF provider, through the designated broker, to the stock exchange and into the hands of individual investors. Through the redemption process, shares move in the opposite manner – from investor through the exchange to the broker, and finally to the ETF provider.

Most ETFs in Canada are organized as continuous offerings, meaning that additional shares may be created by the ETF provider in the same manner as the original creation units.