Series 7 practice questionmediumPackaged Products — ETFs
The creation and redemption mechanism for ETFs involves which type of market participant?
- ARetail investors
- BThe SEC directly
- CMutual fund companies
- DAuthorized participants (APs)✓ Correct answer
Explanation
Why D — Authorized participants (APs)
Authorized participants (APs) are large institutional investors or market makers that create and redeem ETF shares in large blocks called creation units (typically 25,000-50,000 shares). This in-kind creation/redemption process helps keep the ETF's market price close to its NAV and provides tax efficiency since the fund does not need to sell securities to meet redemptions.
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