In an ETF, who are typically the authorised participants?

• A. Custodians holding the underlying assets
• B. ETF sponsors responsible for management
• C. Market makers who facilitate trading
• D. Large financial institutions authorized to create or redeem ETF shares

Answer: (D)

Authorized participants are the large institutions that the ETF sponsor contracts with to create or redeem ETF shares in the primary market. This creation/redemption process is how the ETF keeps its market price in line with its underlying value.

In practice, when demand for the ETF rises, an authorized participant assembles a basket of the fund’s underlying assets (or an equivalent cash amount) and delivers it to the ETF in exchange for a block of new ETF shares. Conversely, when selling pressure exists, the participant can return ETF shares to the fund and receive the corresponding basket of assets. This in-kind mechanism helps minimize transaction costs and tax impact while supplying or withdrawing shares to match investor demand, helping to keep the ETF’s price close to its net asset value.

Custodians simply hold the assets, and ETF sponsors manage the fund’s operations; market makers provide liquidity in the secondary market but aren’t the official entities authorized to create or redeem ETF shares.