ETF creation and redemption explained

iShares explains how an ETF works, so that it can track indices effectively.

In contrast, take a look at How The VIX ETN Lost 50% In 48 Hours, where the TVIX, an ETF that is 2x the reverse of the VIX volatility index, is compared to a chainsaw. Jared Cummans summarizes:

Many investors simply assume that they know what an ETP is just by looking at the name and index, but there is a lot more to it than that. With your standard equity product, there is little to worry about, but when it comes to more complex products like TVIX, investing should be left to only those who truly understand it. Think of these complicated funds as chainsaws; for most people, a chainsaw is an extremely dangerous tool that can cause severe damage for those who do not know how to use it. However, for those experienced enough, the chainsaw is incredibly effective and is a vital tool for many. If you are not experienced with volatility or any complex ETPs for that matter, you probably have no business investing in the first place.


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