Visual Guide to ETFs

Short Scenario 2: Redemption en Masse

The misconception in this scenario is that when there are more shares short than outstanding in an ETF, there can be a redemption, which would cause the closing of the ETF, thus wiping out shareholders who have positions in the fund.

In this theoretical case, all long investors attempt to redeem their shares with the ETF issuer at once. The ETF issuer will accept shares for redemption only if those shares have not been lent out. Shares submitted for redemption must be unencumbered.

As a reminder, in the simplified example described previously, any of the long investors may redeem their shares if they are fully settled by their prime broker; otherwise, the underlying securities will be purchased by the agent ...