Authorized Participants’ activity is at the very core of the ETFs’ functioning mechanism.
What is the Role of Authorized Participants?
ETF issuers rely on a set of firms, called Authorized Participants, to keep the share price close to the fund’s NAV. Authorized Participants operate on both primary and secondary markets alike and are allowed to create and redeem basket of shares directly with the fund itself. Usually this process takes place in baskets of specified number of shares, called creation or redemption units. Put simply, to create shares an Authorized Participant will bring a certain amount of securities to the ETF issuer and will receive in exchange shares for the corresponding value. The opposite happens for redemptions.
In this way Authorized Participants are active on the primary market and by creating and redeeming shares they can alter Fund’s available supply.
Authorized Participants’ Activity in Practice
If, for example, the demand for a certain ETF is very high, the share price might be temporarily pushed higher than the fund’s NAV. This would cause a mismatch between the price available to investors on the market and the official value of a share of the fund. Investors would thus be buying at a premium. An Authorized Participant might then step in and, by creating new shares, increase their supply and accordingly bring down the price.
The opposite situation would take place in case of strong selling pressure. In this case the ETF share price might become lower than the NAV, with investors buying shares at a discount. An authorized participant, by redeeming a basket of shares, would be able to decrease their existing supply and thus push higher the ETF price. Authorized Participants make most of their profits in the markets through arbitrage.
ETF issuers partner with the best authorized participants to ensure a smooth process.
With Which Authorized Participants Do We Partner?
At VanEck Europe we place great attention on the choice of Authorized Participants. We collaborate with some of the leading companies in Europe, including Flow Traders, Jane Street, Societe Generale and others. Please see the full list of Authorized Participants on www.vaneck.com.