What It Is:
How It Works/Example:
However, exchange-traded funds don't sell directly to investors. Instead, each sponsor large blocks (often of 50,000 shares or more) that are known as creation units. These units are then bought by an "authorized participant" -- typically a market maker, specialist or institutional investor -- which obtains shares of the underlying securities and places them in a trust. The authorized participant then splits up these creation units into shares -- each of which represents a legal claim to a tiny fraction of the assets in the creation unit -- and then sells them on a secondary .
Just as closed-end funds don't always trade at a price that precisely reflects the value of the underlying assets in each share of the portfolio, it is also possible for an to trade at a premium or a discount to its actual worth. To liquidate their holdings, most investors simply sell their shares to other investors on the open . However, it is possible to amass enough shares to redeem them for one creation unit and then redeem the creation unit for the underlying securities. Because of the large number of shares involved, individual investors seldom use this .
Why It Matters:
As with any security, the pros and cons should be weighed carefully, and investors should first do their homework to determine whether exchange-tradedare the appropriate vehicle to meet their individual goals and objectives.