There are several articles and other such references that talk about cash flowing in and out of ETFs. The last link also hints at what that might mean, but I want to know more in detail. If they are exchange traded, how/when are new units added? I presume capital gain isnt what is meant when "Inflow" is used.


While I was researching the question I came across the answer and I figured I will post it here for posterity.

It appears that ETFs have a "Creation/Redemption" process which is vital to help the price of the ETF track the index. Essentially, if it is overpriced, more units of the ETF can be created and sold to drive down the price of the fund (netting a profit for the person creating the units), and conversely if they are trading at a discount, the units of the fund can be redeemed for the underlying stocks, to drive up the price (plus profit to the redeemer).

This is an oversimplified answer, and more details can be found here.

Not the answer you're looking for? Browse other questions tagged or ask your own question.