For example, if a large investor wanted to buy a block of ETF shares that exceeded available liquidity in the secondary market, they could contact an authorised participant to arrange the creation of the required shares with the issuer. Conversely, if they wanted to sell a large block of ETF shares, the authorised participant would provide a purchase price for the securities with the investor and redeem ETF shares with the issuer.
As we have seen, although there are some unique moving parts to the ETF story for advisers to get their heads around, their growing global popularity among advisers rests on trading flexibility, price availability and low cost. Advisers are coming to realise that index ETFs are just another way to index. With the end of commission and the opportunity to consider ETFs as part of the whole of market, the growth in ETF adoption will no doubt continue.
Nick Blake is head of retail of Vanguard Asset Management
Key Points
In essence the primary market is where ETF shares are created and redeemed and then they are publicly traded in secondary markets.
Narrow spreads and liquid markets are more attractive to investors, increasing the demand for securities which, in turn, creates higher trading volumes.
The primary market controls the number of ETF shares available to the market.
