How does ETF keep its Market price in line with NAV?

CFA Level II Portfolio Management
#1

Can u explain me this’ How does ETF keep its Market price in line with NAV?’

#2

Because of the in-kind creation/redemption feature.

When the price is too high, investors deliver the underlying securities for new ETF shares; when the price is too look, investors redeem shares for the underlying securities.

#3

Hey,thank you for your reply. I have kind of understood the concept but can you explain it to me in a bit detail .

#4

Suppose that there’s an ETF that holds only GOOG and MSFT, same number of shares each.

If the ETF is trading above its NAV, you buy 100 shares of GOOG and 100 shares of MSFT, deliver them to the ETF manager in exchange for shares in the ETF, then sell those shares and make a profit.

If the ETF is trading below its NAV, you buy 100 shares of the ETF, redeem them for shares in GOOG and MSFT, then sell those shares and make a profit.

#5

Thank you , for your help, you made the topic very clear to me .

#6

Good to hear.

My pleasure.