How do ETFs track underlying index and how expense ratio is collected?

  1. Does it track underlying index by arbitraging between ETF units and underlying assets whenever there is a tracking error?

  2. Is the expense ratio of an ETF collected by adjusting iNAV (similar to how it’s done for mutual funds)?

  1. ETF tracks underlying index by holding shares in same proportion as index. They actively buy and sell the share to ensure holding proportion remains same. There is generally small error in this process called tracking error. Lesser the better
  2. yes

Adding to @Akash_Shah, would suggest you read this chapter on Varsity to learn more about ETFs :slightly_smiling_face:

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