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DEFINITION of 'ETF Sponsor '

The company or financial institution which creates and administers an exchange-traded fund.

To set up the ETF, the sponsor creates the underlying index around which the ETF will be passively managed. The initial securities chosen for the fund are then delivered to the ETF sponsor by various institutional investors, who in exchange receive creation units – large blocks of ETF shares numbering 100,000 or more.

The holders of the creation units then market individual ETF shares to retail investors via the open market (stock exchanges); the ETF sponsor typically will deal only with the creation units and institutional shareholders and will not trade shares directly with retail investors.

BREAKING DOWN 'ETF Sponsor '

ETF sponsors have created quite a large industry for themselves in the time since the introduction of the first ETF, in 1993. Some of the larger, more diversified ETF sponsors may hold a portion of a fund's securities in-house, while others are more strictly focused on marketing, index maintenance and market liquidity. The sponsor also redeems physical securities for creation units should the holders of the creation units wish to make the swap.

When changes need to be made to an ETF portfolio due to changes in the underlying index, the sponsor will work with its creation-unit holders to exchange securities out for new ones that will reflect the updated index.

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