To understand how money is redeemed, you first need to know the difference between the ‘primary market’ and ‘secondary market’. Put simply, the primary market is where securities like stock and shares are created. The secondary market is where those securities are traded by investors and is commonly known as the stock exchange.
If an investor wants to redeem their money, they usually return the shares to the fund manager who then sells the underlying assets and gives the money to the investor (the primary market). This applies regardless of whether the product is an ETF or a mutual fund. If the fund’s assets increase in value, the NAV also increases. Investors can buy and sell at NAV, potentially realising capital gains / losses every day.
ETFs are also traded on the stock exchange (secondary market), meaning they have two prices: the NAV and the stock market price. These two prices are closely linked through the redemption and creation process. If an investor wants to sell ETF shares, they’ll need to notify their broker who will decide whether to trade on the primary or secondary market (assuming this broker is also an authorised participant).
