Does the creation/redemption of ETF shares by an AP when the ETF price deviated too much from its underlying securities cause cap gain distributions?

Question

From Policy Spotlight: Authorized Participants (mirror), which Orange Coast- reinstate Monica referred me to:

If the price of an ETF share deviates from the value of its underlying securities, an AP may have an economic incentive to create or redeem ETF shares.

Which they illustrate with this flowchart:

Does such a creation or the redemption of ETF shares by an Authorized Participant when the price of the ETF share deviates from the value of its underlying securities cause any capital gain distributions to the retail investors?

Answer 1

The creation/redemption process is usually an in-kind transaction - the exchange of securities for ETF shares (and vice versa) is tax exempt. Therefore, the fund doesn't have to sell securities to generate cash and avoids generating taxable gains for non-redeeming shareholders.

This redemption mechanism can also remove capital gains and permit non-redeeming shareholders to defer taxes on their gains.