I suppose for retail investors like us, we mainly buy through the secondary market with the specialists acting as market makers? How about for large institution investors? If the specialists do not have enough ETF on hand, only then they will use cash to purchase the underlying shares, costing commission charges? Thanks.
-1 If the specialists do not have enough ETF’s on hand, they will buy from people that do.
But if there are not enough people selling, they will have to turn to the trust right? Do they buy the underlying share in the market and exchange for the ETFs with the trust?
In-kind transaction is, when you dont pay by cash and instead pay by kind. Institutional Investors are allowed to “create” and “redeem” ETF shares in exchange for underlying stocks in their own portfolio. That way, there is an arbitrage opportunity every time the price of ETF deviates too much from its NAV. And because of that, value of ETF shares remains close to their NAV.
What if the institutional investors do not have underlying stocks and they want to purchase a large amount of ETF? Do they have to buy the underlying shares and pay by kind? Or they are able to pay by cash?
From what I have understood and written above, they would have both the options. They could either buy underlying shares from market and do an in-kind exchange. Or they could buy them cash too. But if enough shares are not available in the market, they will either have to raise the bid price or wait.