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Suppose I own many shares of the SPDR Dow Jones Industrial Average ETF Trust (NYSE Arca: DIA). How can I convert those shares in DIA into shares of the 30 components of the DJIA?

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Yes it can be done, but not by small market participants.

The reason that ETFs that follow a market indexes so closely is because an arbitrage mechanism exists that allows conversion between ETF shares and shares of the underlying basket of securities. The prospectus of the ETF provides the details, but it goes along something like this:

A holder of 100,000 shares of the ETF can ask the ETF to convert them to the corresponding number of shares of the index that the ETF represents, and vice versa - a holder of the relevant number of shares of the index can exchange them for 100,000 shares of the ETF. This quantity is called a 'creation unit'.

If this mechanism is effective, then market participants can buy or sell ETF shares and convert them to index component and sell or buy them at a profit.

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  • If I actually possess 100,000 shares of DIA (worth approximately $24 million at the moment), will I be able to convert those ETF shares into shares of the companies in the index? – Flux May 7 at 5:53
  • If you are a market maker or broker dealer, then perhaps. "Redemption of Units - Only certain institutional investors (typically market makers or other broker-dealers) are permitted to purchase or redeem Units directly with the Trust, and they may do so only in large blocks of 50,000 Units known as “Creation Units.” - from the DIA prospectus – xirt May 7 at 22:39
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You can not. You can BUY the shares, but there is no conversion order or service or something.

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