Economy

...and there's a lot of disagreement about how ETFs influence the market price of the individual components.

1) An ETF is a bucket of investments, like a mutual fund. But unlike a mutual fund where a group of professional managers decide the composition of the fund, an ETF has a specific formula that's public information. Everyone knows the formula.

2) there's no initial offer since it's really just a portfolio.

3) when you go to fidelity/schwab/your broker and buy shares of an ETF, chances are of the quantities that you and I might transact, they've got what it takes in their inventory to allocate all of the components of that ETF to a symbol (the ETF symbol) and drop it in your account. But that's for the common ETF and for the quantities you and I are probably talking about for our purposes.

For less common, or for large quantities, you probably have to talk with the trading desk and the trading desk will have to go wholesale to a mega-bank (JPMorgan/BankofNewYork/Citi) for a price and ability to fill the order.

Example, if an advisor managing a couple hundred million bucks or more wants to put something obscure in the portfolio (let's say CU, the copper ETF) and wants to put say 20 million bucks into CU. That's about 50% of CU's daily volume so it's likely to move the market and would probably take at least most of the day to fill...all while the price is running away from him.

Instead, the advisor calls their broker trade desk and says "get me a buy price on 20 million of CU". Trade desk says "I'll get back to you" and they call JPMorgan (for example), one of the banks who has agreed with the issuers of CU to "block and break" their ETF. In this case, JPM will "block" up the components of CU according to the formula and give the trade desk a price based on the component prices...maybe a "good for 5 minutes" kind of price. Trade desk calls the advisor (or more likely just takes them off hold) and quotes the price. Advisors hits the order and it's done.

Market never seeks the volume so it doesn't have a supply/demand effect directly on the price of the ETF. Any supply/demand effect occurs at the component level as the bank manages their inventory. Advisor now distributes CU out to the various client accounts.

If the advisor is selling rather than buying...the same thing happens but the trade deck asks the bank for the price to "break" the ETF...that is the price for the bank to take that volume of the ETF into their inventory and break it down into components that they may (or may not) keep in their inventory.

I used to have a schematic of this somewhere and I'll see if I can find it but that's the gist of it.

Hopefully this helps vs. hurts.