Exchange-traded funds, or ETFs, are funds that track an index or a group of securities. Shares of ETFs trade on the market similar to stocks and the price per share changes as the shares are bought and sold. So do ETFs have unlimited shares, or is their share count fixed?
ETFs don’t have unlimited shares. One ETF will have a fixed number of shares ranging from ten thousand to six hundred thousand shares. The most common number of shares for an ETF is fifty thousand, and the number of shares is decided by the ETF manager when the fund is created.
This article will explain how many shares are in an ETF, why ETFs can’t have unlimited shares, and how the number of shares in a mutual fund differs from the number of shares in an ETF and why. Furthermore, I have also shared some resources you can use to learn more about ETFs and how to invest in them.
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How Many Shares Are in an ETF?
The number of shares in an ETF is determined when the ETF is created. The ETF manager will choose the total number of shares when they create the ETF, and the share number will be between ten thousand and six hundred thousand. The most common share number is fifty thousand.
So how is an ETF created?
The ETF manager will need to create and file their plan with the SEC to create an ETF. After the plan is approved, the ETF manager will work with someone, such as a large institutional investor or another authorized participant, to create the ETF.
This second person will then create the shares of the new ETF. They do this by borrowing shares of stock, then using them to create ETF creation blocks or units.
Here’s the definition of a creation unit from Investopedia:
“A creation unit is a block of new shares sold by an exchange-traded fund (ETF) company to a broker-dealer for sale on the open market.”
The authorized participant will decide how many shares are created for the new ETF. While the most common number of shares is fifty thousand, there can be anywhere from ten thousand to six hundred thousand shares.
After the ETF is created and the number of shares is determined, the shares are sold on an open market, similar to stocks.
Why ETFs Cannot Have Unlimited Shares?
So why can’t there be an unlimited number of shares of an ETF? The authorized participant gets to choose the number of shares anyway, so why not choose an unlimited amount? Or at least an extremely high number?
An ETF is made up of shares of stocks or other securities. Other securities have a limited number of shares, so ETFs must have a limited number of shares.
The ETF manager won’t be able to buy unlimited shares of stocks to create their ETFs. The number of stock shares that they can buy is limited, and that number will determine how many shares there will be.
The price per share of an ETF is always very close to the price of the securities that make up the ETF, so the number of shares needs to mirror the number of shares of the securities it’s made up of. Otherwise, the price per share would be different.
Having unlimited shares would also have a huge effect on the price of the ETF shares. A high supply of shares wouldn’t match the demand for the ETF, so prices would drop below the actual value of the securities within the ETF.
In addition, ETFs trade similar to stocks. Stocks can’t have an unlimited number of shares either. If there were an unlimited number of stock shares, the buying and selling that occurs on the market wouldn’t exist, affecting prices. The same is true for ETFs.
Without the trading of shares, there’s no point in having a market since anyone could buy a share without needing someone else to be selling theirs or vice versa.
How Do Shares of an ETF Differ From a Mutual Fund?
Unlike ETFs, many mutual funds have an unlimited number of shares. These mutual funds, called open-ended mutual funds, will sell as many shares as investors are willing to buy.
Even though the number of shares outstanding of a mutual fund can change, the price at which each share is sold will stay the same. The price of one share of a mutual fund is calculated by dividing the number of shares by the total assets.
For example, say a mutual fund has ten million dollars in assets, and the number of shares outstanding is one million. Divide ten million by one million for a share price of ten dollars.
Even if ten more shares are sold at ten dollars each, for a total of ten million and one hundred dollars and one million and ten shares outstanding, the price for one share is still equal to ten dollars per share.
The price per share of mutual funds is different from the price of ETFs, which changes as the ETF shares are traded on the market. The price per share of ETFs can change multiple times per day depending on how much they are being bought and sold that day.
However, just because most mutual funds can issue an unlimited number of shares doesn’t mean they all do. There are also closed-end mutual funds, which have a fixed, limited number of shares available.
Similar to ETF share prices, the price per share of a closed-end mutual fund will change based on the daily activity of the market. You can only buy and sell shares when the market is open, and what you buy or sell the shares for can change whenever the market is open.
Learn More About ETFs
If you want to start investing in ETFs or just learn more about how they work, the resources in this section will help you greatly.
You can learn the basics of an ETF and what risks you can face when investing in them in this investing basics video from TD Ameritrade:
This next YouTube video from ETF.com explains how ETFs are created and redeemed:
There are also great books available on Amazon.com that can teach you about ETFs:
- Index Funds and ETFs: This book will teach you how ETFs trade, how they’re better than other types of investments, and how you can make a successful plan to invest in them.
- A Comprehensive Guide to Exchange-Traded Funds (ETFs): You’ll learn how to use ETFs to enhance your investment portfolio, analyze ETFs and their performance, and how ETFs come to other types of investments from this book.
- The Ultimate Etf Guidebook: You’ll learn how ETFs started, how they’ve developed over time, and how you can invest in ETFs to make the best investment portfolio for you from this book.
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Conclusion
ETFs can’t have an unlimited number of shares for many reasons, including the limited number of shares of the securities within them and the effect that unlimited shares would have on the price per share. The number of shares in an ETF is determined when the ETF is created and is usually around fifty thousand shares.
If you want to invest in a fund with an unlimited number of shares, you can invest in an open-ended mutual fund where there’s no minimum or a maximum number of shares outstanding at any given time.
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