What are ETF "inflows"?

[Onward]

The financial press is making a big deal lately of large ETF "inflows." But ETF shares trade back and forth on exchanges. There are no "inflows," as there are in open-ended mutual funds. ETF shares get created when large investors swap blocks of the underlying for "creation units" of the ETF, but I don't know that this process tracks overall investor demand.

So what do they mean by "inflows"?

 

[traineeinvestor]

I can't speak for all ETF's but for some of the ones listed here in HK the answers are (i) a "tap" facility and/or (ii) issues by the manager/market maker to the market.

A tap facility allows institutional investors to exchange units in the ETF for a basket weight of underlying assets or a basket weight of underlying assets for units in the ETF. In effect the instituntional investor can arbitrage any price discrepancies between the prices at which the underlying assets and the ETF are trading.

The tap mechanisim serves two purposes: (i) it results in the ETF tracking the underlying index reasonably closely and (ii) it creates additional liquidity.

An ETF will often have a market maker (which may or may not be the manager or one of its affiliates). The market maker will provide liquidity but may satisfy demand for units by requiring the ETF to issue additional units. If the market maker borrows units from another investor in order to meet demand, it may also require the ETF to issue new units which it can return in place of the borrowed units. In some markets it is mandatory to have a market maker for each ETF.

Details of these arrangements should be availble from the manager or trustee of the ETF.

 

[haha]

The financial press is making a big deal lately of large ETF "inflows." But ETF shares trade back and forth on exchanges. There are no "inflows," as there are in open-ended mutual funds. ETF shares get created when large investors swap blocks of the underlying for "creation units" of the ETF, but I don't know that this process tracks overall investor demand.

So what do they mean by "inflows"?

Unlike older closed end funds, ETFs try to manitain a market price very close to the NAV. So there there is creation of units in response to market demand for the ETF which has pushed up the premium. Thus the #units, and also the market cap are not constant.

An Inside Look At ETF Construction

Ha

 

[MichaelB]

Two questions here. What are inflows, and what does the financial press mean when they use the term.

Inflows mean additions. New new investment. So, as Mr Ha explains, ETF inflows would be new creation units.

What the financial press means is another thing, and I suspect it means whatever the writer was thinking, which could be anything at all. Too general and undefined to be really meaningful IMHO.

 

[Onward]

Thanks folks. What I was missing is that additional creation units do track investor demand, as large investors arbitrage away disparities between the price of ETF shares and the value of the underlying. Those disparities result from ebbs and flows in overall demand for the ETF shares.

An Inside Look At ETF Construction

Very good article. I wasn't aware of the increased tax efficiency that an ETF may have vs. a mutual fund.