12 – L2 11 Arbitrage V2

You may be wondering why an AP would bother creating or redeeming ETF shares. After all, what’s in it for them? Do they charge a percentage fee the way an ETF sponsor does? No, but they do find other ways to make the transaction worth their while. This benefits investors too, because the actions of the AP helped to align ETF share prices with the stocks that they represent. Before we go into how this happens, let’s review the concept of arbitrage. Arbitrage is the act of buying and selling assets that should be of the same value but that are priced differently in the market. When an investor finds a price difference between two assets that should be interchangeable, then they can buy the cheaper one and simultaneously sell the more expensive one and make a profit on the difference.