An authorized participant is a designated trader allowed to exchange an ETF’s underlying stock basket for newly created ETF shares, or surrender ETF shares for the underlying stocks. This create/redeem mechanism helps keep the ETF’s market price near its net asset value (NAV). section 4.1.2
Closing an ETF premium or discount
Suppose XYZ has a NAV of $10 per share but trades at $9.95. An authorized participant can buy ETF shares, redeem them for $10 of stocks, and capture the $0.05 difference. Buying pressure then pushes XYZ’s price toward NAV. If XYZ trades above NAV, the participant can exchange the underlying basket for newly created ETF shares and sell them. section 4.1.2
Authorized participants can also support tax-efficient ETF rebalancing. In a heartbeat trade, the fund receives cash to buy replacement securities, then gives the participant appreciated holdings during withdrawal instead of selling them and realizing capital gains. section 4.2.3
Table 4.1 Sector weights in the market and optimized portfolios
| Stock | Shares | Share price | Value |
| A | 15,000,000 | $40 | $600,000,000 |
| B | 3,000,000 | $100 | $300,000,000 |
| C | 2,000,000 | $50 | $100,000,000 |
Use the holdings table to calculate the ETF’s underlying basket value and compare it with the traded share price. section 4.1.2
Table 4.2 Old and new index weights
| A | B | C | D | E | |
| Old weight | 50% | 30% | 20% | 0% | 0% |
| New weight | 0% | 45% | 30% | 15% | 10% |
Compare old and new index weights to see why rebalancing requires exchanging an outdated holding for replacement securities. section 4.2.3
