Custom Basket Definition

Learn the definition of custom basket and other ETF terminology from the etf.com glossary.

ETF
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Reviewed by: etf.com Staff
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Edited by: etf.com Staff

Learn more about Custom Basket

A custom basket in the context of ETFs refers to a unique set of securities chosen by authorized participants (APs) during the creation or redemption process. APs can assemble a custom basket that aligns with the ETF's underlying index, allowing for more efficient and cost-effective creations and redemptions. This flexibility enables APs to optimize trading strategies and manage transaction costs. Custom baskets enhance the liquidity and price efficiency of ETFs by accommodating the specific needs of market participants. This mechanism is integral to the ETF structure, promoting the close tracking of the fund's market price to its net asset value.

Related Terms

Authorized Participant (AP), Creation and Redemption Mechanism, Liquidity, Net Asset Value (NAV)

ETF Glossary is etf.com’s collection of key terms and definitions related to exchange-traded funds. ETFs are investment funds that are traded on stock exchanges, and they can encompass a wide range of asset classes, including stocks, bonds, commodities and more. Given the diverse range of ETFs and the complexity of financial markets, having a clear understanding of ETF-related terminology is instrumental for investors looking to make informed decisions, manage risks effectively and navigate the evolving landscape of ETF investments.