Compared to their mutual fund brethren, an exchange-traded fund (ETF) is more dynamic in that it can trade like an individual stock. This allows investors to purchase and sell them freely on an exchange like stocks.
How does an investor take advantage of these benefits? The easiest way for investors to access the world of ETFs is to open a brokerage account.
How ETFs Are Created
In order to understand where investors can purchase ETFs, it’s necessary to know how they’re created. The process of creation and redemption is what regulates the supply of ETFs in the marketplace.
This process will involve an authorized participant (AP) who can redeem shares of an ETF via sale to the fund’s sponsor. The authorized participant comprises a part of a larger ecosystem for ETFs.
Click here for more information on this ETF ecosystem.
Market demand will be the primary determinant for the amount of redemption and creation activity. Demand for the ETF will also drive the price of its shares, which in turn, determines whether the ETF is trading at a discount or premium relative to the value of its underlying assets.
Instead of using a creation and redemption process, shares of a stocks are issued by the company themselves through an investment bank. Furthermore, transactions involving stocks include a counterparty who must purchase or sell the stock at an agreed-upon price.
An ETF trade will involve a liquidity provider as opposed to a counterparty with an opposing viewpoint on the price of a stock.
Where to Purchase ETFs
Like stocks are shares or fractional ownership of a company, the ETF owns underlying assets and divides ownership of those assets into shares. As such, these shares can be bought and sold on a major exchange.