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A comment on S&P 500 to exclude Snap after voting rights debate. Parent comment

Re:S&P 500 to exclude Snap after voting rights debate by hendzen on Tuesday August 01, 2017 @05:08PM (#14905337)
This is completely wrong - not how ETFs work at all. If you have a large block of SPY you can redeem it for the index constituents. If you have a large block of the index constituents, you can redeem it for SPY.

When the SPY price rises above the price of the constituents, arbitrageurs (firms like Jane Street) will go and buy the constituents and create some SPY shares (and sell them for a profit). Similar for if the SPY price falls below the corresponding weighted sum of the constituents.

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Re:S&P 500 to exclude Snap after voting rights debate by JumpCrisscross on Tuesday August 01, 2017 @06:00PM (#14905784)
You're both right. There are two broad classes of exchange-traded products (ETPs): exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

ETFs have a creation-redemption mechanism [1]. This keeps tracking error [2] low. It also forces ETFs to actually hold their component stocks.

Some clever financial engineers noticed they could approximate most of an index's performance with a few names and some clever trading. They issue ETNs. These are notes issued and backed by usually an investment bank that promise to pay interest in a way linked to an index. They have no requirement to hold the index's constituents.

[1] http://www.etf.com/etf-education-center/7540-what-is-the-etf...

[2] https://en.m.wikipedia.org/wiki/Tracking_error

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