ETFs work quite similarly to normal stocks, while at the same time also having a bit of a difference in how they are created / maintained, due to the creation of those baskets and whatnot. What I'm curious about is the following:
- What happens when I buy shares of an ETF? Is it the exact same as with a stock, where another participant sells me their shares of the ETF, thus resulting in a simple trade? But then how does the size/AuM of an ETF ever increase? Some ETFs have way more underlying assets (In $ amount, not how many securities are in the basket) than others, so I figured that it is due to the ETF being more popular and therefore more people being invested in it, similar to how closed-end funds get bigger by having more people invest in it (where the fund then buys the underlying with the received cash). But if all ETF trades are just trading existing ETF shares, how does an ETF actually grow in size / how do more ETF shares get generated?
- An ETF is supposed to track some kind of underlying index most of the time. This is being done by buying securities making up that index. However, quotes on exchanges are supposed to be driven by supply & demand, i.e. if a security has a lot of buy orders, the price is supposed to increase. Can and does that happen with ETFs as well? Imagine an extremely large market buy order for an ETF is hitting the exchange. Will price be driven up? But that would mean that it doesn't correctly track the underlying anymore, since the underlying has not changed in price, unless that buy order was actually split up in buy orders of the different underlying securities (which goes back to my question 1)?
Thank you for your help!
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