Do ETFs suffer dilution like shares?

An ETF is a fund that holds other securities. The value of the ETF shares should be close to the value of the constituent shares. A common mechanism to ensure this is a creation/redemption process through which authorized participants such as market makers can create new ETF shares or convert ETF shares into other assets.

The ETF will usually post a basket of securities they would like to get. Someone else can give this basket to the ETF and get a block of shares of equivalent value instead. Small differences between the value can be settled in cash. And in the other direction, someone can return some ETF shares to the ETF, and get a basket of the ETF's assets of equivalent value instead.

So this process merely exchanges shares at the same value, it doesn't dilute the value of ETF shares. For every $1 in shares created by the ETF, the ETF will receive other assets at that value and thus grow by that value. ETFs are generally open-ended funds.

Of course, the ETF value might diverge slightly from the value of the basket. This presents an arbitrage opportunity. If the ETF shares are more expensive than the basket of assets, someone will create new ETF shares for those cheaper assets, increasing supply of the ETF shares and lowering the price. And if the ETF shares are too cheap, someone will buy them in order to convert them into the more valuable assets, increasing demand for the ETF and raising the price.