Issuing And Redeeming ETF Units Explained
This guide is part of our Comprehensive Guide To ETFs. We strongly recommend checking out the guide in full to get a better understanding of ETFs.
The following is an extract taken from the ASX that describes the issuing and redeeming process in some detail.
Issuing more units
“ETFs are issued on the primary market to authorised participants. These participants can create and redeem units in an ETF.
You can only buy ETFs on the secondary market (ASX). The authorised participant applies to the issuer for units in the ETF.
Instead of paying cash for these units, the authorised participant delivers a basket of securities equal to the value of the ETFs. The basket of securities to be delivered reflects the composition of the index underlying the ETF.
Once the issuer creates the new units, the authorised participant is able to sell them to buyers on ASX.” 
An authorised participant transfers ETFs to the issuer. The issuer will deliver a basket of the underlying securities to the authorised participant. The issuer will then cancel the ETFs.
Process of exchanging units for underlying is called ‘in-specie’ or ‘in-kind’ process.
Where is the underlying portfolio?
The underlying securities are transferred to a custodian who will hold who will safeguard them in a trust structure. The custodian is independent from the issuer.
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 What are ETFs, ASX, 2011