Select Investor Profilechevron

What type of investor are you?

Individual Investor
Institutional Investor
phone iconContact
pdf download icon

ETF Creation & Redemption

ETF Education - ETF CREATION & REDEMPTION text layered over a stick figure man with a tie holding a pointing stick.

In a watershed event, the first mutual fund in the U.S. was created in 1924, revolutionizing how investors could purchase and sell baskets of stocks, bonds, or commodities. More recently, the U.S. launched its first ETF with an updated structure that allows for more tax efficiency.

Although both mutual funds and ETFs are typically structured as open-end funds, the later initiation of ETFs into this investment structure family means that they feature some differences versus mutual funds. Namely, ETFs are eligible to be traded on an exchange and throughout the trading session.

This occurs with the help of an authorized participant (AP), or “middle person,” that stands between the ETF and the investor, who typically provides a two-sided market on the exchange for the ETF. The AP is authorized to transact with the ETF to either create or redeem shares of the ETF.

Here is a diagram of how a typical ETF creation works:

ETF Creation Diagram
During ETF creation, the investor purchases shares of the ETF on an exchange. The AP, otherwise known as the market maker, sells the shares of the ETF to the buyer. The AP will then go out and buy the appropriate basket of underlying securities to hedge themselves, and then deliver that basket of securities to the ETF fund itself. The ETF will then issue shares to the AP for end delivery to the investor.

Here is a diagram of how a typical ETF redemption works:

ETF Redemption Diagram
During an ETF redemption, the investor sells their shares of the ETF on an exchange. The AP will buy those shares of the ETF and sell the basket of underlying securities to hedge themselves. Once completed, they will deliver the shares of the ETF to the ETF fund and receive in return shares of the underlying basket which offsets the earlier underlying shares that the AP sold, thereby collapsing their position.

Harbor Capital Advisors

Harbor Capital Advisors is an asset manager known for curating an intentionally select suite of active ETFs from boutique managers. Advisors looking for distinct and differentiated investment options for their clients' portfolios often connect with our passionate obsession to find what we believe to be the best - bold solutions that have the potential to produce compelling, risk-adjusted returns.

For more information, visit www.harborcapital.com.

Important Information

Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Shares are bought and sold at market price not net asset value (NAV). Market price returns are based upon the closing composite market price and do not represent the returns you would receive if you traded shares at other times.

ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold.

Please refer to the appropriate Prospectus, or the Tax Center for general tax information about any of the Harbor funds. The information provided should not be construed as specific tax, legal or investment advice. If you have questions, please consult with your tax adviser to determine the appropriate use of this information for your tax situation.

Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.

3632278

Blue Background

Connect with us | LinkedIn Logo IconLinktree icon to podcast media links

Harbor Funds Distributors, Inc. is the Distributor of the Harbor Mutual Funds.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.
FINRA Brokercheck logo in white color

Investing involves risk and the potential loss of capital.

Investors should carefully consider the investment objectives, risks, charges and expenses of a fund before investing. To obtain a summary prospectus or prospectus for this and other information, click here or call 800-422-1050. Read it carefully before investing.

All trademarks or product names mentioned herein are the property of their respective owners. Copyright © 2024 Harbor Capital Advisors, Inc. All rights reserved.