How SPY ETF really works? [closed]

Question

So this is very confusing. If you read online they say that:

"SPY is an exchange-traded fund (ETF) that tracks the Standard & Poor's 500"

Now the word "track" is super confusing and sound passive. I may understand one of these:

1. If it track those 500 companies, that means they affect SPY, but SPY doesn't affect them with it's own demand.
2. When I buy SPY I basically bought all of those 500 companies, which means the price of SPY is affected both by the demand of it's own stock, and also by all the stocks it represents(eg Apple), and it also mean that if i buy SPY I basically affect Apple and Amazon's stocks demand.

Sometimes, it seems (like now) that most stocks goes down and SPY doesn't, which makes me wonder, again - who affect SPY - those who buy the SPY ETF itself, or those who buy the companies it represent ?

Answer 1

SPY returns, like any other ETF, are fully explained by the weighted returns of its components + any fees & expenses. It tracks the S&P in the sense that the fund's management tries to keep those weights as close as possible to the weights in the index. Any difference between the index returns and the ETF returns are referred to as the fund's tracking error.

Supposing that SPY's tracking error is close to zero, any sufficient increase/decrease in the ETF's market price that isn't explained by changes in its constituent's prices could be arbitraged away.

Higher prices of the constituents drive the fund's NAV up, which in turn makes the ETF price go up.