Risk glossary

An exchange-traded fund is a fund listed on-exchange that invests in a basket of assets – most commonly equities but also bonds, currencies, commodities and derivatives – with pricing updated throughout the day. ETFs exist for different asset classes, markets, sectors and investment styles.

Some ETFs provide short or leveraged exposure to reference assets and are backed by derivatives rather than cash securities.

In the primary market for ETFs, so-called authorised participants (APs) create and redeem ETF shares by exchanging them for baskets of assets in wholesale transactions with the ETF issuer. APs trade ETF shares with other trading firms in the secondary market.

Given that APs are not obligated to create or redeem shares, regulators have raised concerns about whether the creation and redemption process might break down in stressed conditions and cause ETF prices to become dislocated from underlying assets.

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