Explain how ETF shares are created and redeemed and what role authorized participants play

ETF shares are created and redeemed in the primary market by authorised participants, broker-dealers under contract with the sponsor. To create shares an AP delivers the basket of securities the fund specifies and receives a large block of ETF shares called a creation unit; redemption reverses the exchange. Because the exchange is usually in kind, the fund need not sell securities to meet outflows, which keeps trading costs out of the fund and helps tax efficiency. APs also arbitrage price gaps: when the ETF trades above the value of its basket they buy the basket, create shares and sell them; when it trades below, they buy shares and redeem. The trap is thinking ordinary investors create or redeem shares directly.