Which of the following is least likely a purpose of the in-kind creation/redemption of an ETF?
A)
Lower cost.
B)
Narrowing the arbitrage gap.
C)
Tax efficiency.
Explanation
The in-kind creation/redemption process serves three purposes: lower cost, tax efficiency and keeping market prices in line with NAV. Arbitrage gap is the band around NAV at which the ETF should trade at and is not affected by the in-kind creation/redemption process.
So is the arbitrage gap a predetermined minimum difference between ETF market price and NAV which indicates when arbitrage will occur? In-kind creation/redemption will keep market price in line with NAV within this minimum difference, but outside of this gap, arbitrage will take place and reduce the difference between market price and NAV back to the arbitrage gap at least. What affects this arbitrage gap. In a simple CFA world, is this just assumed constant??