Ch.7 · Total Expense Ratio Limits · hard
What is the 'arbitrage' mechanism that keeps ETF prices close to NAV?
0% of students got this wrong
EXPLANATION
Authorized Participants (APs) — typically large institutional investors or market makers — maintain ETF price efficiency. If ETF trades at a discount to NAV: APs buy cheap ETF units on exchange and redeem directly with AMC at NAV (profit = discount). If at a premium: APs create new units by delivering underlying securities to AMC and sell on exchange at premium. This arbitrage keeps ETF prices close to NAV.
Practising Chapter 7 one question at a time?
Try the full chapter — 80 questions, tracked score, weak area breakdown.