What is a redemption mechanism?

A process which aims to ensure that exchange-traded funds (ETFs) can resolve the differences between net asset value (NAV) and market values when shares of the ETFs are bought and sold. This mechanism allows ETFs to be different from mutual funds or unit investment trusts as they can trade more fluidly.

Where have you heard about redemption mechanisms?

Although it's not the most widely used term in the financial world, you may hear investors talk about redemption mechanisms when they're weighing up the benefits of different exchange-traded funds.

What you need to know about redemption mechanisms.

Redemption mechanisms set exchange-traded funds apart from mutual funds and unit trusts.

In order to ensure an ETF doesn't stray too far from its net asset value, a dealer can arbitrage its shares with the shares that form its underlying portfolio. Alternatively, they can choose to purchase or redeem a large number of the fund's shares.

Thanks to this facility, investors in exchange-traded funds can avoid certain fees associated with mutual funds.

Find out more about redemption mechanisms.

Exchange-traded funds are just one type of fund available to investors. To learn more, see investment fund.