Who bears the transaction costs of assembling a basket of stocks for an ETF create basket?

When authorized participants create ETF shares, they typically deliver a basket of securities to the fund in exchange for newly issued ETF shares. The AP, not the fund’s existing shareholders, generally bears the costs of sourcing and delivering that basket, including underlying bid-ask spreads, market impact, financing, hedging, and any applicable creation fees. Those costs are then reflected in the economics of ETF trading. APs and market makers will not create or redeem shares unless the expected arbitrage opportunity compensates them for those frictions. As a result, creation/redemption costs help determine the ETF’s arbitrage band and may be reflected in premiums or discounts to NAV and in the bid-ask spread quoted on exchange. So when investors buy or sell ETF shares in the secondary market, they often pay these trading frictions indirectly through the ETF’s bid-ask spread or execution price. This structure helps protect long-term shareholders from the dilution that can occur in mutual funds, where shareholder flows may force the fund itself to buy or sell securities.