What it is
Creation and redemption is a core process for exchange-traded funds (ETFs) that maintains the alignment between an ETF's market price and the value of its underlying assets, known as its net asset value (NAV). Authorized participants (APs) are the only entities that can create or redeem ETF shares directly with the fund issuer. When demand for an ETF drives its market price above its NAV, APs create new shares. Conversely, when the market price falls below NAV, APs redeem shares.
This process is fundamental to how ETFs trade and is often discussed when analyzing ETF efficiency or arbitrage opportunities. In a "creation," an AP delivers a basket of underlying assets (e.g., Bitcoin for a spot Bitcoin ETF) to the ETF issuer in exchange for a block of new ETF shares. In a "redemption," the AP returns ETF shares to the issuer and receives a basket of underlying assets. This mechanism keeps the ETF's market price close to its NAV, preventing significant premiums or discounts and ensuring liquidity.
Why it matters
This mechanism keeps an ETF's price aligned with its underlying assets, minimizing premiums or discounts. Understanding it helps investors trust an ETF's pricing accuracy and liquidity.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice