Which of the following statements accurately describes the creation mechanism for most Exchange Traded Funds (ETFs)?

Question: Which of the following statements accurately describes the creation mechanism for most Exchange Traded Funds (ETFs)?

Answer options:

• New ETF units are created by the ETF manager issuing units directly to retail investors based on market demand. ✅ Authorized Participants (APs) create new ETF units by delivering a 'creation basket' of securities to the ETF manager in exchange for new units.
• The ETF issuer redeems units directly from retail investors if the ETF's market price falls below its Net Asset Value (NAV).
• New ETF units are formed when the underlying securities are converted into ETF units through a direct exchange on a stock exchange.

Correct answer: Authorized Participants (APs) create new ETF units by delivering a 'creation basket' of securities to the ETF manager in exchange for new units.

Explanation: ETFs typically use a creation/redemption mechanism involving Authorized Participants (APs) who exchange a basket of underlying securities for new ETF units, or vice-versa, with the ETF manager.