Behind every ETF is a mechanism that keeps the price close to the value of what the fund owns. Here is how it fits together.
An ETF does not have a fixed number of units. Large financial institutions, called authorized participants, can ask the issuer to create new units or redeem existing ones.
When demand rises, they deliver the underlying securities or cash and receive new units in return. When investors sell, it works the other way. This happens in large blocks, not unit by unit.
The fund's actual value per unit is called the NAV, net asset value, and is calculated every day at the close. During the day, the market price can deviate slightly from the NAV.
If the gap grows large, the authorized participants can profit from creating or redeeming units. That pulls the price back toward the real value.
On the exchange, market makers continuously quote buy and sell prices, so it is always possible to trade. They are independent of the issuer.
The difference between the buy and sell price, the spread, is a cost you do not see in the product sheet. You still feel it in your account, and it can be larger in the local currency than in dollars or euros.
A physical ETF owns what it tracks. The assets are held by a custodian, separate from the issuer.
A synthetic ETF gets its return through an agreement with a counterparty, typically a bank. That can make the product cheaper, but creates a risk if the counterparty cannot pay.
The quality of an ETF or ETP can be assessed on three levels. The first is the index, which should be rules-based and open about how prices are sourced and converted into the right currency. The second is the structure, meaning whether the product is a regulated fund or a debt security. The third is trading on the exchange: how closely the product tracks the index, and how good the liquidity is.
Crypto adds an extra challenge. The crypto market is open around the clock, while the exchange is closed in the evenings and at weekends.
If bitcoin moves a lot while the exchange is closed, the price can jump when it opens again. The product is meant to track the cryptocurrency one to one, and the issuer must buy or sell the underlying cryptocurrency as units are created or redeemed.