There is massive amount of confusion among the ETF client base about the creation and redemption process. For many years, the C/R process has been advertised as the way to access the hidden underlying liquidity in the ETFs. While it is true that the liquidity is from the underlying basket, it is a mistake for clients to think they are actually doing creations and redemptions. The C/R process is basically just the back-office functionality that enables APs to manage their positions on the trading books. It allows trading desks to be more aggressive in making markets and providing liquidity. The APs have registered with the issuers to deal on the primary market on a daily basis. They are providing the liquidity, either via executing a basket for the client or trading in the ETF, and cleaning up the their positions with either a creation or redemption. Clients are able to achieve an NAV execution plus or minus small fees. But clients are not doing the creation/redemption; they are having it done on their behalf. What makes this distinction so important? The semantics are important because many clients think the creation process restricts them to certain sizes that they must do in order to gain access to a specific ETF. Although that may have been true several years ago, in the current world, there are plenty of providers who are willing to aggregate the order flow, so clients can get NAV executions in almost any size they desire.
The creation and redemption process is at the heart of the ETF product wrapper. Open-ended issuance, as the process of daily creations is called, enables ETFs to grow to accommodate demand. Then, when demand reverses and the underlying are no longer in demand, Authorized Participants (APs) are able to redeem positions. This is one of the reasons that ETFs tend to trade within a tight band around their NAV. The forces of supply and demand are manageable with this just-in-time inventory process.