Definition
Creation Basket
The creation basket is the specified list of securities, with quantities, that an authorised participant must deliver to an ETF (or receive on redemption) to create or redeem one creation unit.
Each Indian ETF publishes its creation basket, usually mirroring the underlying index's constituents in index weights, along with a cash component for any residual. The basket is updated to reflect index rebalancing, corporate actions and dividends accrued in the fund.
The transparency of the creation basket is what enables authorised participants to compute fair value and arbitrage the ETF against its underlyings, keeping the traded price close to iNAV. A clearly defined basket also lets APs hedge precisely when they warehouse units before selling them on-screen.
Related terms
- ETF Creation/RedemptionCreation and redemption is the primary-market mechanism by which authorised participants exchange a basket of underlying securities (or cash) for new ETF units, or hand back units for the basket, keeping the ETF price aligned with its NAV.
- Authorised ParticipantAn authorised participant is a large institutional intermediary contracted with an ETF issuer that has the exclusive right to create and redeem ETF units directly with the fund in large blocks.
- In-Kind Transfer (ETF)An in-kind transfer is the exchange of the actual underlying securities, rather than cash, between an authorised participant and an ETF when units are created or redeemed.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.