Of course fund will only buy whole and large amounts of shares, so say you put 1 ETF share worth $100, the fund won't be hurrying to buy shares with it, until they got $1000000 to start buying wholesale.
The ETF will actually never buy the shares. You can only buy existing ETF shares from other traders.
ETF shares are created by large financial institutions - JPM/GS/other big players have the option to make an in-kind trades of share in securities for ETF shares. I.e., if an ETF is 50% MS and 50% AAPL, a large trader can trade 50k shares of AAPL and 50k shares of MS for 100k shares of the ETF. (Similarly, they can perform the reverse trade.)
From what I understand when the ETF achieves cash position needed to generate 1 creation unit (usually 50k ETF shares, as you correctly point out), then the fund is absolutely required to purchase underlying shares that index it's tracking requires it to hold. It can't just hold cash and promise to track index nevertheless. Or do you mean that first comes the Creation Unit, and then people can buy shares in ETF?
In case of ETN there's absolutely no obligation to purchase anything, as they're simply debt of issuer; a promise to repay you in the future according to predetermined index or underlying movement.
Maybe you meant ETNs?
P.S. I re-read what you wrote, and I think what you're saying is that large institutions are intermediaries between ETF and investor. That is absolutely correct, and probably is so 99% of the time in the market anyway regardless of whether shares purchased are of individual companies or funds. But ETF is still required to hold the assets it states it will hold, that was my point.
You don't trade cash for the creation unit, you trade one creation unit of shares in the underlying securities. If 1 share of AMSETF is claimed to be equal to 0.5 shares in AAPL and 0.5 shares in MS, you hand 50k shares of AAPL and 50k shares of MS to the managers of AMSETF. They create 50k shares of AMSETF and hand them to you.
No cash changes hands (unless cash is one of the underlying assets of the ETF), so the ETF is never sitting on cash with the obligation to purchase shares.
In general, it's very unusual to hand cash to an ETF in return for shares (unless cash is one of the underlying assets). I'm not even sure it is legal to do so.
It sounds like you are expecting the ETF would be creating more shares frequently which it does not. That would have to happen as a secondary offering and it would dilute the value of all the other shares in circulation, Assuming they are the same class share.
There's no dilution with ETF. When ETF shares are created (via formation of Creation Unit), the ETF holdings increase by equal amount of underlying assets. You can create as many ETF shares as market demands (until you run out of possibility to buy underlying assets).
The ETF will actually never buy the shares. You can only buy existing ETF shares from other traders.
ETF shares are created by large financial institutions - JPM/GS/other big players have the option to make an in-kind trades of share in securities for ETF shares. I.e., if an ETF is 50% MS and 50% AAPL, a large trader can trade 50k shares of AAPL and 50k shares of MS for 100k shares of the ETF. (Similarly, they can perform the reverse trade.)