Exchange traded funds have helped investors access various markets and assets throughout normal trading hours with the help of a dedicated group of traders working behind the scenes.
ETFs, like traditional open-end funds, represent an investment basket backed by underlying assets, but unlike mutual funds, ETFs are traded throughout the day. Consequently, this allows some to weave between the ETF and underlying markets and to capitalize on potential opportunities, reports Ari I. Weinberg for the Wall Street Journal.
ETFs trade in two markets: the secondary markets that everyone typically monitors on a stock exchange and the primary market where specific authorized participants help create and redeem ETF shares.
Everyone should be familiar with the secondary market as it refers to the on-screen, quotable market that we track through price changes on the stock exchange, similar to tracking a company’s stock. However, ETFs are also traded on a primary market where APs and the ETF sponsor help create and redeem ETF shares for underlying securities or holdings, which occur at the net asset value of the ETF, through so-called in-kind transactions. [How ETFs Are Traded]
Every day, ETF issuers distribute a list of securities and holdings that reflect the basket of stocks, bonds commodities or cash that they will take in exchange for an ETF share. In turn, market makers examine the basket, determine their bids to help best contribute to fluid marketplace and capitalize on the spreads and rebates between the ETF price and its NAV.