So this isn't a topic I expect to help my trading but I like to fill my head sometimes with what I call useless information. Something that has crossed my mind a few times is exactly how do ETFs' work. Lets take mutual funds for a quick reference. From my understanding, the value of a fund is calculated daily and any buy or sell orders are exchanged at this time through the fund. This seems very simple to manage and understand. Now ETFs' are funds put together and sold on an exchange and are free to be traded at any time the exchange is open. What I'm curious is how is price determined. On a stock for example it's basically supply/demand I guess in basic terms. Theirs a set amount of shares issued that are on the float and a company has a value and traders meet to buy and sell at a price they deem fare value at any point in time. Now ETF's are made of various products and you can go to I think all the big managers of these funds and see whats in the ETF and its weight. As a retail trader are you expecting market makers to adjust value based off the underlying in the fund? How does supply and demand come into play in ETF's as is their a set limit of funds issued or can they just keep pumping out more of a particular product. In this case, wouldn't it be possible to just have to many issues out to allow liquid trading? These ETF's all have fees that don't come out of your account if you hold the ETF, their issued in the price. So how is this calculated and how is fair value of the fund determined? What makes an ETF more popular then another? I mean I don't have the numbers in front of me but theirs countless that track the same indexes for example. What makes SPY so much more popular then other S&P 500 ETF's. I'm guessing the issuer of the ETF is kind of a market maker of their product and buy and sell when they see value vs the underlying. Is this correct? Just an off road topic to my market knowledge. The internet seems to be impossible to find any useful information these days. Many keyword searches turned up endless pages on why to invest in ETFs'
Regarding the intraday trading of the ETF this is how it works. Basic Equity ETF (SPY, XLF, etc...)= Underlying Stocks * Weight + Cash Component(Mostly accumulated dividends from underlying components) The issuer publishes a daily file that says what the weight of each underlying stock is and what the cash component is. Market makers (i'd assume almost all HFT these days) use this information to create a fair value and make a market around it. Market makers can also create and redeem the ETF in exchange for the underlying (plus cash). Usually that is done in units of 50,000 shares of the ETF. I'm fairly sure the issuer does not do any market making. Fees come out of the cash component. SPY was one of the earliest S&P 500 etfs if it was not the first.