In-kind creation or redemption refers to a process used in the operation of exchange-traded funds (ETFs) to manage their underlying portfolios. This process involves the transfer of securities or other assets directly between the ETF and its authorized participants (APs), rather than through cash transactions.
In-kind creation occurs when an ETF creates new shares by exchanging a basket of underlying securities with an AP. The AP delivers the basket of securities to the ETF in exchange for newly created ETF shares. This process is used to add liquidity to the ETF and increase its size.
In-kind redemption, on the other hand, occurs when an AP returns a basket of ETF shares to the ETF in exchange for the underlying securities. This process is used to remove liquidity from the ETF and reduce its size.
In-kind creation and redemption are important processes in the operation of ETFs, as they allow for more efficient and cost-effective management of the ETF portfolios, and can help to reduce the impact of market volatility and improve the performance of the ETFs over the long-term. However, it is important for investors to understand that these processes may also involve certain risks and costs, and to carefully consider these factors before investing in ETFs.