When a new index fund is created, how does it go from a concept to product?
Where does the money come from to buy the initial investments that are needed for the fund to have its advertised characteristics? Does the founder provide an initial investment? If so, how is the initial capitalization of the fund decided?
I only can describe it roughly: The designer of the ETF defines the relation of the price of one share to the index value. E. g., they can define that at index 3380, the share is worth $33.80.
Then, one or more authorized participants can turn a basket of the respective company shares to a number of, say, 10,000 ETF shares and offer them for $338,000 plus a certain spread at an exchange. An investor can buy them there.
If the prices of the underlying securities change, the ETF price on the exchanges change as well due to the changed behaviour of the buyers and sellers.
In the U.S. the ETF sponsor files with the SEC. If approved, the sponsor forms an agreement with an authorized participant who has the authority to create or redeem ETF shares.
The AP borrows shares, places them in a trust, and the trust provides the AP with ETF units. The ETF shares are then sold to the public on the stock exchange.
