Question of the Week

Questions of the Week

Co-founder of the Switzer Report
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Question 1: I’m a bit puzzled by how an ETF (exchange traded fund) grows in size. I understand that for a listed ASX company, shares can be created by way of a capital raising or destroyed by a share buy-back, both of which would influence the share price, given the change in supply. So how does an ETF or Asset Manager achieve the same? I can see that dividends paid to the ETF may not be fully distributed but invested, but how can it otherwise grow or contract if units are only traded on the ASX one for one?

Answer: An ETF (or quoted managed fund) grows or contracts because it (via a market maker) becomes the main buyer or seller of units on the ASX. When you purchase an ETF on the ASX, the seller will often (but not always) be the Fund itself. It then creates those units. Conversely, if you sell units on the ASX, the buyer will often (but not always) be the Fund itself. Those units are then cancelled.

The ETFs either do this directly (they engage a market maker to enter bid and offer quotes on the ASX), or indirectly through a broker who provides the same service, but has access to the Fund to do bulk creations/redemptions of units.

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