The main advantage of authorized participants for investors is that they hold ETF prices close to the net inventory values of the underlying securities. Without authorized operators, ETFs would become closed funds. In this situation, ETF prices could be far removed from net inventory values, particularly in the event of significant upward or downward movements. There are many examples of closed funds that have fallen significantly above or below the value of their assets. On the other hand, ETFs generally remain very close to their net inventory values. Any full-service NSCC member who has entered into an agreement on authorized participants with an ETF agent and distributor/sponsor to become an authorized participant may use NSCC`s ETF processing service. At the end of the day, both sides benefit from cooperation. The sponsor receives assistance for the creation of the fund, while the participant receives a block of shares that is resold for a profit. This process also works the other way around. Authorized members will receive the same value of the underlying security in the Fund after the sale of shares.
Licensed participants make most of their profits in the ETF market through arbitration. Authorized participants increase market transparency by keeping etf prices close to their net inventory values. When most investors buy an ETF, they want to bet on a certain asset class. The most obvious thing is that someone who buys a total stock market ETF hopes that stock prices will rise. Typical investors do not want to check whether the funds are acting above or below their net inventory values. However, some long-term investors prefer closed funds because of the occasional possibility of finding steep discounts. In practice, authorized participants ensure that premiums and discounts never become too large in the ETF market. An ETF distributor and an AP sign an agreement that „authorizes“ the AP to create and exchange shares with a specific ETF. ETF shares are available for the establishment and reimbursement of certain amounts that include a „production unit.“ A typical creative unit is 50,000 ETF shares; With an share price of $25, this would represent $1.25 million of ETF shares. Authorized participants are the capital market intermediaries in the process of creating and withdrawing the ETF. This process is a key feature that distinguishes ETFs from their investment fund counterparties. Understanding the role of APS in the world of ETFs is essential for anyone who wants to launch any type of ETF.
Retail investors cannot become authorized participants. Several authorized participants help improve the liquidity of a specific ETF. Competition tends to keep the exchange of funds close to their fair value.