ETF Mechanics and Strategies

Free CFA Level II lesson in Portfolio Management. 14 min read, ~2,059 words.

Creation = premium (AP buys underlyings, delivers to issuer, sells new ETF shares); redemption = discount (the mirror image), pushing price toward NAV. In-kind mechanism avoids realizing capital gains, the source of ETF tax efficiency over mutual funds. Tracking difference = cumulative return gap (systematic); tracking error = standard deviation...