To create, the participant delivers a basket of the underlying securities, or cash, and receives ETF shares. To redeem, the flow runs in reverse. Everyday investors never touch this process; they trade existing shares on the exchange.
The mechanism is what keeps an ETF's price near net-asset-value. If the ETF trades above the basket's value, creating and selling shares is profitable, and the act of doing it pushes the price back down. See etf-arbitrage.
In-kind creation also drives the tax efficiency of US equity ETFs: securities leaving the fund as redemption baskets do so without triggering a realised gain at the fund level, unlike the forced sales inside a redeeming mutual-fund.
Related: authorized-participant, etf-arbitrage, net-asset-value, etf, mutual-fund, liquidity