ETF OVERVIEW - ETFS IN DETAIL

  1. How are ETFs created?
  2. How does the in-kind creation and redemption process work?
  3. What is the Net Asset Value (NAV)?
  4. What is the relation between the NAV and the price of ETF shares on the market during the trading day?
  5. What is the intra-day portfolio value (IPV)?

How are ETFs created?

ETFs are created when a professional investor, such as an investment bank, places an entire portfolio of stocks with a fund manager. In return for this deposit, the professional investor receives a specific quantity of ETF shares, which can then be traded on the exchange where they can be bought and sold by retail or professional investors from anywhere in Europe.

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How does the in-kind creation and redemption process work?

Creation. The authorised participant - generally a large financial institution - creates ETF shares by depositing a portfolio of stocks into the applicable fund in exchange for an institutional block of ETF shares (usually 50,000). This is known as "in kind" creation because a basket of stocks is exchanged for ETF shares rather than using cash.

The decision to create ETF shares is based on a number of factors, including the to fill orders, the need to create inventory or simply to take advantage of arbitrage opportunities that arise.

The basket of shares that is deposited by the authorised participant represents the weighting of such shares in a particular index (e.g., the NASDAQ-100 Index) accompanied by a cash component to cover such things as creation fees, accrued dividends, interest on dividends, any capital gains less losses that have not been reinvested since the last distribution and small amounts to cover differences resulting from the rounding of the number of shares that need to be delivered.


Redemption. To adjust inventory or to take advantage of arbitrage opportunities, the authorised participant can redeem ETF shares daily.

The price of the shares of the ETF is calculated as specified in the ETF prospectus. The ETF shares are delivered as specified in the prospectus, and the stocks that comprise the index (plus a cash component as the case may be) are delivered to the authorised participant, after deduction of redemption fees and expenses.

Creation and redemption in cash. Some tracker funds allow for the creation and redemption of ETF shares in cash at a specified minimum level (which is smaller than the Creation Unit) in certain circumstances.

Such transactions may be subject to cash transaction fee.

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What is the Net Asset Value (NAV)?

The NAV generally represents the total value of all the investments that are managed by a particular fund, which is equal to the assets less the liabilities.

The NAV is given per ETF share that is outstanding by dividing the total value of the fund by the number of shares that are issued and outstanding.

This value is calculated daily on the basis of the value of the underlying index securities, the cash component and any other investments (e.g. bonds, derivatives) that the fund may have.

The Net Asset Value forms the basis for the creation and redemption process.

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What is the relation between the NAV and the price of ETF shares on the market during the trading day?

The NAV represents the intrinsic value of the ETF shares, but the prices of the ETF shares on the market may fluctuate during the trading day (e.g. because of normal forces of supply and demand). However, spreads between the NAV and the price on the market are usually close because of the intervention of professional investors or "arbitrageurs" that will step in to take advantage of any premiums or discounts to the underlying value by either creating ETF shares and selling them on the market when they trade at a premium or by redeeming ETF shares and selling the underlying stocks when the ETF shares trade at a discount.

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What is the intra-day portfolio value (IPV)?

The NAV is a static value that is calculated and disseminated once a day. However, during the day the value of the investments of the fund may also fluctuate due to changes, for example, in the value of the index securities or changes in the currency exchange rates. The IPV has therefore been designed as an estimate or approximation of the intrinsic value of the fund during the trading day.

The IPV does not reflect the value at which the ETF shares can be created or redeemed (this is reflected by the NAV). Also, the IPV may not reflect the current value of the underlying securities in instances where that value is not continuously updated, e.g. where the underlying securities trade in different time zones. Therefore, investors interested in subscribing for or redeeming ETF shares or purchasing or selling shares on a stock exchange should not rely solely on any intra-day portfolio value which is made available in making investment decisions, but should also consider other market information and relevant economic and other factors (including, where relevant, information regarding the index, the index securities and financial instruments based on the index corresponding to the relevant fund).

An intra-day portfolio value (the "IPV") may be made available with respect to EQQQ through this website. Any intra-day portfolio value is not, and should not be taken to be or relied on as being, the value of a share or the price at which shares may be subscribed for or redeemed in Creation Units or purchased or sold on any stock exchange. For example, any IPV provided for EQQQ outside normal U.S. trading hours when the component stocks are generally traded may not reflect the true value of an EQQQ share, may be misleading and should not be relied upon. The inability to provide the IPV on a real time basis for any period of time, will not in itself result in a halt in the trading of the stock on a stock exchange. Investors should be aware that the calculation and reporting of any intraday portfolio value may reflect time delays in the receipt of the relevant index schedule prices. Investors should refer to the prospectus for the Nasdaq Funds plc for further information.