Now In Reverse: The Redemption Process
The redemption process is simply the reverse of the creation
process. The AP purchases a large number of ETF shares
on the open market, then redeems or exchanges the shares
for the underlying basket of securities and sells them to
the market. Once again, there are no trading costs for the
portfolio and all of the transaction costs are covered by the
AP. This is still an in-kind transaction because there is no
cash exchanged.
As alluded to earlier, the ETF redemption process may provide
investors with enhanced tax efficiency. When a share of a
mutual fund is redeemed, the fund is often required to sell
some of its portfolio holdings to raise the necessary cash to
return to departing shareholders. And when a fund sells its
holdings, it incurs capital gains, which are then are distributed
to the remaining shareholders. But since an ETF’s shares are
exchanged in-kind for equal value, there is no taxable gain
on the transaction¹.
¹ This information does not constitute tax advice. Please consult your tax advisor
and/or state and local tax offices for more complete information.
ETFs are subject to risks similar to those of stocks and may not be suitable for
all investors. Investment returns and principal value will fluctuate so that when
shares are redeemed, they may be worth more or less than original cost.
Securities are not guaranteed by any bank, are not insured by the FDIC or any
other agency, and involve investment risks, including the possible loss of the principal
amount invested.
RydexShares are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
Rydex Investments 9601 Blackwell Road Suite 500 Rockville, MD 20850
800.820.0888 Send us your comments
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Key Points to Remember
It all begins with the
Authorized Participant— only the Authorized
Participant can create or
redeem shares of an ETF.
When creating an
ETF, common stock is
exchanged for ETF shares.
No cash is exchanged for
ETF shares, making this
an in-kind transaction.
An ETF’s shares are exchanged in-kind for
equal value, so there are
no taxable gains on the
transaction—enhancing
an ETF’s tax efficiency.
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