01Definition
A large financial institution permitted to create or redeem ETF share baskets directly with the fund.
02Bridge between fund and exchange
Ordinary investors trade ETF shares on an exchange. An authorized participant is among the institutions allowed to exchange large baskets of cash or underlying assets for newly created fund shares and reverse the process.
03Arbitrage, not a guarantee
When ETF price diverges from NAV, basket creation or redemption can become profitable. The mechanism usually narrows the gap, but stress, balance-sheet cost or operational limits can weaken arbitrage.
⌖Reference points
01
Retail investors are not APs
02
APs transact in large creation units
03
The mechanism narrows premiums and discounts
04
Arbitrage has balance-sheet and operational costs