ETF creation and redemption

Imagine Jana buying an ETF share. The seller can offer a share someone already owned; only the holder changes. Creation works differently: the AP delivers the required contribution and the product issues new shares in return. The AP can keep them or sell them on an exchange. In redemption, the AP returns the required block of shares, receives the specified consideration, and those shares are cancelled. Assets therefore enter or leave the product. Its terms determine the size and composition of the block, or basket; there is no single basket that applies to every ETF. [1]

Take our simplified example with no costs or price movements. The product has net assets of USD 100,000,000: asset value after liabilities. There are 2,000,000 shares, so NAV, net asset value per share, is USD 50. The AP now contributes USD 2,000,000 for 40,000 new shares. Afterwards, 102,000,000 / 2,040,000 = 50. More shares exist, but matching assets have arrived too. In this model, issuing additional shares alone has not reduced the value of Jana’s share. NAV is not necessarily the price at which she can currently trade on an exchange. [1]

In the same model, the AP now returns 20,000 shares for USD 1,000,000. The product loses assets, but the returned shares are also cancelled. That leaves 101,000,000 / 2,020,000 = USD 50 per share. A fall in total assets need not, by itself, mean a loss for Jana. This is a hypothetical product with a suitable basket size, not iShares Bitcoin Trust ETF (IBIT) basket-size data. The model explains the relationship between assets and shares; actual outcomes can be affected by costs, incorrect valuation and prices moving during the process. [1]

With cash creation, the AP supplies money and the trust arranges the associated bitcoin purchase. Cash redemption requires the corresponding sale. In-kind transfers the underlying asset itself: the AP delivers bitcoin for new shares, or receives it on redemption. The US Securities and Exchange Commission, SEC, permitted this in-kind process for exchange-traded crypto products, or ETPs, on July 29, 2025. The cited IBIT prospectus permits both bitcoin and cash. That approval does not require every AP to support both routes; the particular terms and participants’ capabilities still matter. [3] [2]

Agreeing an exchange is different from delivering what was promised. Settlement is the stage at which the required money, bitcoin and shares actually move under the transaction’s rules. The cited IBIT prospectus separates the order cutoff from subsequent delivery. It specifies 15:59 ET on the trade date for in-kind and 18:00 ET on the preceding Business Day for cash. ET means US Eastern Time. These are the cited product version’s terms, not universal deadlines for all funds. Timely submission alone does not prove completed settlement or that all assets have been delivered. [2]

Return to the example’s two operations: creation of 40,000 shares and redemption of 20,000 produce a net increase of +20,000 shares. Gross activity, which counts both directions together, is 60,000 shares. Another exchange sale of 1,000 existing shares between investors adds nothing to those primary flows. It belongs to secondary trading, where ownership changes. It also matters what period the figures cover, whether they measure shares or money, and whether the operations are merely ordered or settled. [1]

Continue without further contributions or redemptions. The product still has 2,020,000 shares. If its existing assets rise in value so that NAV goes from USD 50 to USD 60, net assets increase from USD 101,000,000 to USD 121,200,000. The USD 20,200,000 difference is revaluation in this model, not fresh capital flowing in. Nobody had to contribute more money or bitcoin. Growth in total assets therefore cannot automatically be described as new investor purchases. Real reports also require separating fees, liabilities and other changes. [2]

The mechanism depends on participants being able to carry out the necessary trades and transfers. The IBIT prospectus describes operational and network constraints and possible suspension of creation or redemption. The exchange price may then remain above NAV, called a premium, or below NAV, called a discount, for longer. Jana normally tries to exit by selling her share on the exchange. The presence of APs does not itself entitle her to withdraw BTC from the trust to her own wallet. Assessing the product therefore involves costs, AP access and actual settlement status, not just whether creation and redemption appear in its prospectus. [2]