Authorized Participant

Authorized Participant

An institutional investor that takes part in the creation of an exchange-traded fund (ETF). An exchange-traded fund is an investment company that tracks all the stocks on a particular exchange. When an ETF is created, an authorized participant buys the shares that are to underlie it and gives them to the fund's sponsor in exchange for units (or shares) in the new ETF. The authorized participant then sells these units to investors. Authorized participants are handpicked by the sponsor of the ETF.

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Authorized participant. An authorized participant is an institutional investor who takes part in the creation of exchange traded fund (ETF) shares.

The ETF sponsor selects authorized participants to assemble creation units, which are baskets of securities in the index that underlies the ETF. Each creation unit corresponds to a fixed number of shares in the ETF.

The authorized participant transfers the creation unit to the ETF sponsor in exchange for shares in the ETF, which can then be sold to other investors. Authorized participants may also redeem ETF shares by trading them back to the ETF sponsor for corresponding baskets of securities.

Since ETFs exchange shares only for corresponding baskets of securities and don't buy back shares investors wish to sell, they don't have to keep cash on hand or liquidate securities to meet redemption demands. As a result, ETFs are able to track the underlying index more closely and achieve tax efficiency.