A MUTUAL FUND on a security, BASKET or index, that trades on an EXCHANGE with continuously quoted and constantly changing prices, and which provides investors with the ability to engage in SHORT SALES and borrow against a position. Unlike CLOSEDEND FUNDS, which often trade at a substantial PREMIUM or DISCOUNT to NETASSETVALUE (NAV), ARBITRAGE activity in the creation and redemption process ensures that ETFs trade very close to NAV. Authorized participants deposit PORTFOLIOS of securities with the TRUSTEE to create ETF shares and withdraw them to redeem shares; accordingly, they are aware of the value of the underlying PORTFOLIOS versus the price of the ETF and can take advantage of any perceived arbitrage opportunities, which keeps the quoted price near the NAV.
Black’s Law Online Dictionary
