Definition
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.
In an in-kind creation, the authorised participant delivers the precise creation basket of constituent shares to the Indian ETF and receives units; redemption reverses this, handing back units for the basket of stocks. Because no securities are bought or sold by the fund itself, in-kind transfers are tax- and cost-efficient.
In-kind dealing minimises the fund's transaction costs and helps keep tracking error low, since the fund is not forced to trade in the market for routine flows. Some Indian ETFs, particularly bond, gold and certain index products, use cash creation/redemption instead when in-kind delivery is impractical.
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.
- Creation BasketThe 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.
- Tracking ErrorTracking error is the standard deviation of the difference between an index fund or ETF's returns and its benchmark index's returns, measuring how consistently the fund follows the index.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.