Chartered Financial Analyst (CFA) Practice Exam Level 2

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What is the main purpose of an ETF's creation basket?

  1. To list all authorized participants

  2. To publish daily liquidity information

  3. To determine the securities the ETF issuer wants to own

  4. To calculate the ETF's market premium

The correct answer is: To determine the securities the ETF issuer wants to own

The main purpose of an ETF's creation basket is to determine the securities the ETF issuer wants to own. When an ETF is created, authorized participants (APs) assemble a basket of securities that reflects the ETF's investment objective and strategy. This creation basket consists of the underlying securities that will be delivered to the ETF issuer in exchange for ETF shares. This process is essential for maintaining the ETF's investment strategy and ensuring that the ETF’s portfolio closely tracks its benchmark index. By defining what securities to include in the creation basket, the issuer effectively controls the composition of the ETF’s holdings, which influences its performance and alignment with investor expectations. This practice also ensures liquidity, as it helps facilitate the trading of the ETF shares by matching the underlying assets with the shares issued. In this context, the other options do not capture the primary function of the creation basket. Listing authorized participants is related to the process of interacting with the ETF but does not define the ETF's assets. Publishing daily liquidity information pertains to operational transparency, not the purpose of the creation basket. Calculating the market premium is about evaluating the price of the ETF relative to its net asset value, which is separate from establishing the underlying securities for the ETF.

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