Where am I buying ETF units from?

Investing and Markets 📈
#1

Just wondering if anyone can help me with the answer here as I can’t seem to find anything online;

If I invest in an ETF, am I buying a share that already existed (a unit from a market maker that has presumably come from another investor), or is a new unit of that ETF created for me and if its the latter, does the fund then buy more shares of its holdings?

And if I sell a share, is that portion of the fund destroyed (sold) for me to redeem my money?

I’m just trying to work out if more people investing in an ETF means that the fund buys more shares of its holdings and becomes bigger or not?

Thank you for any help.

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#2

I’m far from an expert but my understanding is you’re buying a share that already existed and new shares are created or destroyed by approved market makers when the price either goes above or below the price of the underlying holdings (by at least a margin of around 0.5% to account for the stamp duty cost).

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#3

You don’t directly create or destroy shares when buying/selling an ETF for the most part you are just trading existing units.

Authorised participants can create / destroy shares of an ETF by redeeming against the underlying holdings. This means that the ETF value remains tied to the value of its underlying assets (as any deviation represents an opportunity for them able to redeem it).

https://www.etf.com/etf-education-center/etf-basics/what-is-the-creationredemption-mechanism?nopaging=1

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#4

Thanks both. So, is new capital ever introduced to an ETF to allow it to buy more of its holdings?

#5

Yes, that’s what the 2 previous comments described. If parts are created, this is an influx of money used to buy the underlying holdings.

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