How Are ETFs Traded On An Exchange?

This guide is part of our Comprehensive Guide To ETFs. We strongly recommend checking out the guide in full to get a better understanding of ETFs.

ETFs in Australia trade on the ASX. The ASX is a secondary market meaning that securities are traded between market participants and not the companies that issue them. This means that ETFs are traded between participants on the exchange and not the actual fund itself.

When a market participant buys units in an ETF on the ASX they are actually buying the units from another participant who is selling them. They are not buying the units from the actual fund itself. This is very different from unlisted funds (funds that don’t trade on the ASX) like most managed funds. Managed funds require buyers to submit forms and deposit money to the actual fund in order to buy units in it.

 

How ETFs Work Diagram

How ETFs Work Diagram

Units not shares

While ETFs may hold shares in their underlying portfolios, they do not issue shares. Instead, like managed funds ETFs issue units. Each unit entitles the unit holder to a portion of the underlying portfolio equal to the proportion of units that they hold. The units in the ETF are the securities that are traded on exchanges. They function similarly to shares but have different legal rights attached to them.

 

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