Wednesday, December 29, 2010

Creation Unit

A creation unit is the smallest block of shares that can be purchased or redeemed directly from the fund company that runs an ETF. Creation units are generally traded by large institutions and authorized participants due to their size (which an vary between 25000 to 600000 ETF shares each). Creation units are a denomination of underlying assets that can be redeemed for a certain number of ETF shares (i.e. a basket of underlying stocks that are representative of the index). The trading of creation units allows institutions to arbitrage away price differences between the ETF price and the NAV.

Synonyms: ETF basket

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