How do ETFs work?
ETFs share many of the characteristics of individual securities and traditional mutual funds, but they operate differently, giving them certain advantages over other investment solutions. With traditional mutual funds, an individual investor usually buys or redeems shares directly with the fund company. When shareholders redeem shares, the fund manager may have to sell securities to meet those redemptions, possibly incurring capital gains that will eventually be passed on to the fund’s shareholders. ETFs, on the other hand, are traded like individual stocks. Investors buy and sell shares on a stock exchange through a broker or brokerage account during normal operating hours. Designated brokers and underwriters engage in “in-kind” transactions with the fund itself, trading baskets of securities for very large blocks of shares called “creation baskets.” These transactions, which result in the creation or redemption of ETF shares, occur at net asset value (NAV). Market trades by individua
