During ETF creation, what is a creation unit?

• A. The ETF sponsor creates a cash deposit to the AP
• B. The APs deliver a basket of securities to the custodian in exchange for a block of ETF shares
• C. The ETF sponsor buys the underlying securities directly
• D. The creation unit is the fund's cash reserves

Answer: (B)

In ETF creation, a creation unit is the large block of ETF shares that is created in exchange for an in-kind transfer of assets from an Authorized Participant. The AP assembles a basket of securities that mirrors the ETF’s underlying index, delivers that basket to the ETF’s custodian, and in return the ETF sponsor issues a block of ETF shares equal to that basket—the creation unit. This in-kind exchange helps keep the ETF’s price aligned with the index and preserves tax efficiency.

The other options describe cash deposits or actions by the sponsor that aren’t how a creation unit is formed: it isn’t simply a cash transfer, and the sponsor doesn’t buy the underlying securities directly in this process, nor is it just the fund’s cash reserves.