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I wonder what happens if too many investors want to purchase a given ETF. On one side, the ETF share price is approximately the sum of the ETF holdings divided by the number of ETF shares, since deviations are corrected by ETF Arbitrage (mirror). On the other side, unless more shares are issued, the price should raise. Does this mean the ETF managers issue more shares if too many investors want to purchase a given ETF?

Franck Dernoncourt
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Yes, either the fund management decides so, or someone else with a big wallet will ask them to 'create' new instances.

You can see the daily impact of offer and demand in the ETF's descriptions - typically the list a NAV (Net Asset Value) price and a market price. Higher demand makes the market price higher than the NAV; lower demand makes it lower.

For example VTI (https://investor.vanguard.com/etf/profile/VTI)

Market price as of 02/17/2021 $206.69
NAV as of 02/17/2021 $206.72

Aganju
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  • Thanks how do you create new instances? Automatically buying the same underlying securities? Placing the money in some stash of cash waiting to be invested? Sth else? – Franck Dernoncourt Feb 18 '21 at 08:42
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    Only the fund management can do that. For serious investors dropping 8+digits in a fund, they will work with you and create you those shares; or when the market needs it. I slightly adjusted my wording to make it clearer. – Aganju Feb 18 '21 at 08:53
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    @FranckDernoncourt It depends on the ETF. Often, there's a clearly defined creation/redemption process. The ETF declares a basket of securities it would like to get. Any authorized participant (in particular, market makers) can exchange such a basket for new ETF shares, which means they will have to buy the needed securities and then transfer them to the ETF. Small differences are settled in cash. Note that this means the ETF will have to do little trading of its own, as rebalancing can be done through creation/redemption with suitable baskets. – amon Feb 18 '21 at 09:33