Editor’s note: This is general educational information about a market mechanism, not investment advice, and it does not concern any particular fund. It is based on the official rules, exchange reports and filings listed at the end.
Analysis: what has to hold for the anchor to hold
The creation and redemption system is often described as guaranteeing that price tracks value. It guarantees nothing of the sort. What NI 81-102 fixes is the primary market price, and what a dealer supplies is the willingness to trade against a spread. The link between the two is commercial, and it is only as strong as the dealer’s ability to transact in the underlying basket at prices close to the ones used in the valuation.
That points at where a careful reader would look. The first question is what the basket contains. A fund holding large capitalisation Canadian equities can be assembled in minutes; the top traded symbols in the Q2 2026 ETF report are broad index and sector products where that is true. A fund holding thinly traded credit, or foreign securities whose home market is closed while Toronto is open, cannot be, and the valuation used for creation is then an estimate that the dealer has to underwrite. The gap that appears in such funds during stress is not a failure of the mechanism. It is the mechanism reporting the cost of the trade.
The second question is how many dealers are willing to do it. The rule is silent on the number, and concentration in the trading data is a reasonable proxy for concentration further up the chain. A product where one firm supplies the primary market has a narrower buffer than the rulebook implies. The third is the size of the prescribed block itself, which the manager sets and can change, and which determines how much capital a dealer must commit before the arbitrage is available at all.
None of that is disclosed in the daily price. It sits in the fund’s prospectus and its ETF facts document, which is the four page document the dealer must send after the trade rather than before it.
What the documents say
An exchange traded fund listed on Toronto Stock Exchange trades all day at whatever price buyers and sellers agree on. The basket of securities it holds is worth something different, recalculated continuously. Those two numbers stay close to each other, and they do so because of a wholesale mechanism that almost no retail order ever touches: a standing right for large dealers to swap baskets of securities for blocks of fund units, and blocks of units back for baskets. National Instrument 81-102 is where the terms of that right are set.
Two markets, one unit
An ETF is defined in National Instrument 41-101 as a mutual fund in continuous distribution whose securities are listed on an exchange and trading on an exchange or an alternative trading system. Continuous distribution is the important half. Unlike a closed end fund with a fixed unit count, an ETF can keep issuing and cancelling units for as long as it is listed.
That produces two separate markets in the same security. In the secondary market, units change hands on the exchange between investors at a price set by supply and demand. In the primary market, a small number of dealers deal directly with the fund manager, and the price there is not a negotiated one. Under section 9.3 of NI 81-102, the issue price of a unit must be the net asset value per security next determined after the fund receives the purchase order. Under section 10.3, the redemption price must be the net asset value per security next determined after receipt of the redemption order. The primary market transacts at asset value by rule.
The prescribed number of units
The unit of account in the primary market is defined in NI 81-102 as the manager prescribed number of units, meaning the number determined by the manager from time to time for the purposes of subscription orders, exchanges, redemptions or other purposes. A dealer does not create one unit. It creates or redeems a block whose size the manager sets, and the size is set large enough that only firms with balance sheet and settlement capacity participate.
The rule also allows those blocks to move in kind rather than in cash. Section 9.4 permits payment of the issue price by good delivery of securities where the fund would be permitted to buy them, the portfolio adviser finds them acceptable and consistent with the fund’s investment objectives, and their value is at least equal to the issue price. Section 10.4 permits redemption proceeds to be paid by good delivery of portfolio assets valued at the amount used in calculating the net asset value per security, and for an exchange of a manager prescribed number of units it does so without needing the separate written consent that other in kind redemptions require. A creation is therefore a basket in and units out, and a redemption is units in and a basket out, with no forced selling on either side.
Settlement timing sits in the same sections. Cash or securities paying the issue price must arrive at an order receipt office no later than the second business day after the pricing date, and redemption proceeds are generally payable within two business days after the date the net asset value used to set the redemption price was calculated. Exchange traded funds that are not in continuous distribution get a longer window of 15 business days, which is one of the clearer signals in the instrument that continuous distribution is the structural feature doing the work.
Where the arbitrage comes from
Put the two prices side by side. If exchange demand pushes the unit above the value of the underlying basket, a dealer can buy the constituent securities in the market, deliver them to the fund at valuation, receive newly created units, and sell those units on the exchange at the higher price. The creation adds supply and pushes the traded price down toward asset value. If the unit trades below the basket, the dealer buys units on the exchange, delivers a prescribed block to the fund, receives portfolio securities valued at net asset value, and sells them. The redemption removes supply and pulls the price up.
Neither leg depends on a view about the fund. The profit is the gap itself, and the act of harvesting it closes the gap. Nothing in NI 81-102 obliges any dealer to do this. The rule creates the right and fixes its price. Whether the right is exercised depends on whether the spread covers the dealer’s cost of assembling or liquidating the basket.
Retail investors sit outside that mechanism by design. Section 10.3 provides that where a holder redeems fewer than the manager prescribed number of units, the redemption price may be calculated by reference to the closing price of the security on the exchange where it is listed rather than at net asset value. A small holder gets the market price, not the asset value. Disclosure is handled separately: NI 41-101 requires an ETF facts document of no more than four pages, prepared in plain language in the form prescribed, posted to the fund family website within 10 days of filing, and delivered by the dealer no later than midnight on the second business day after the purchase.
The scale this now runs at
The Canadian market this machinery supports has grown quickly. In the July 2026 MiG Report, TSX counted 278 new listings across TSX and TSX Venture Exchange year to date, of which 176 were exchange traded products, more than three times the 51 new mining listings in the same period. The Q2 2026 TSX ETF Report records 86 new ETFs brought to the exchange by 19 issuers in that quarter alone.
Flows are running at records. TSX reports Canadian ETF flows of $44.3 billion in the second quarter and cumulative half year inflows of $104.2 billion, both citing National Bank of Canada Capital Markets, against a Canadian stock market that passed $7 trillion in market capitalisation over the same period. Actively managed ETFs are reported at $308.3 billion in total assets, up $65.7 billion from the 2025 year end. Trading is concentrated: in the second quarter of 2026, TMX venues accounted for 46.54% of combined continuous trading volume, and iShares alone accounted for 67.8% of ETF options volume by average daily volume.
