Authorized participants are the people behind the scenes that make sure the value of the ETF is in line with its net asset value. They would receive ETF shares in exchange for a basket of underlying securities or receive a basket of underlying securities when they redeem ETF shares. When there is a premium or discount in the ETF, authorized participants step in to capitalize on the arbitrage opportunities.
Furthermore, a fund provider may also have to dip into foreign markets as a way to help redeem or create new ETF shares for an internationally focused fund.
Besides the market aspect, fund providers also have to monitor changes in the underlying holdings that could affect an ETF’s weighting. For instance, managers will have to check on corporate actions, which include mergers and spin-offs, and index rebalancing or reconstitution. Additionally, for international ETFs, they will have to track overseas orders and place trades with international brokers. [How to Use ETFs in a Trend-Following Strategy]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.