An Exchange-Traded Fund (ETF) tracking the S&P/TSX 60 Index is trading at a premium to its Net Asset Value (NAV). How would Authorized Participants (APs) typically respond to this situation, and what would be the likely impact on the ETF's price?

Question: An Exchange-Traded Fund (ETF) tracking the S&P/TSX 60 Index is trading at a premium to its Net Asset Value (NAV). How would Authorized Participants (APs) typically respond to this situation, and what would be the likely impact on the ETF's price?

Answer options:

• APs would redeem ETF units from the fund, decreasing supply and further widening the premium. ✅ APs would create new ETF units by delivering baskets of securities, increasing supply and helping to narrow the premium.
• APs would sell units on the secondary market without interacting with the ETF creator, having no effect on the premium.
• APs would buy existing ETF units on the secondary market to capitalize on the premium, driving the price higher.

Correct answer: APs would create new ETF units by delivering baskets of securities, increasing supply and helping to narrow the premium.

Explanation: When an ETF trades at a premium to NAV, APs are incentivized to create new ETF units by delivering underlying securities to the fund. This increases the supply of ETF units, which in turn helps to bring the market price back in line with the NAV, narrowing the premium.