Exchange-traded funds (ETFs) stand out from other types of funds, due to their transparency, liquidity and low costs. ETFs uniquely combine an open-ended structure with on market trading, enabling the supply of ETF units to the market to be increased (creation) or decreased (redemption) depending on investor demand.
While the characteristics of ETFs are well known, we cast a light on some of the key features and players that drive the success of this instrument in our ETFs Explained series.
Know your terms
Authorized Participants: A broker-dealer that is contracted with the ETF issuer to create or redeem shares on behalf of market makers and institutional investors.
Market maker: A dealer that buys or sells at specified prices at all times: also known as liquidity providers.
Primary market: Market where ETF shares are created and redeemed.
Secondary market: An exchange or over the Counter (OTC) where ETF are traded.