What keeps an index ETF pegged to the index?

An authorized participant (AP) is an organization that ensures that ETF prices stay aligned with the value of their underlying assets. They are large banks such as GS, BAC, JPM, etc. They achieve this via the process of creation and redemption of ETF shares, which allows them to benefit from an arbitrage opportunity.

If an ETF's price is higher than its Net Asset Value (NAV), an AP will purchase the underlying securities and bundle them into "creation units" (blocks of 50,000 shares) and exchange them with the ETF issuer for new ETF shares at the NAV. The AP can then sell the ETF shares, benefiting from the difference in price.

Conversely, when the ETF trades at a discount, an AP will reduce ETF shares in circulation by the price of the underlying shares.

The creation and redemption mechanism that keeps the price of an ETF aligned with its underlying net asset value (NAV)

When the trading price of an ETF share gets too far from the underlying value of the share, then the ETF can go though the process of creating or redeeming shares.

The ETF works with another financial company to purchase company shares and assemble blocks of additional ETF shares, which are then sold to investors when the price is too high. The reverse can also be done if the ETF share price is lower than the parts.

This keeps the price in a narrow range when compared to the underlying value.

Old style index funds tried to hold a mix of stocks as close to that of the index as they could manage and so move with it. Pegged to the index because they are holding the index.

This did run into the problem of not always being able to get enough shares of the stocks in the index to cover all their shareholders, and generally solved that by trying to make up the difference with stocks expected to have the same performance as the shares they couldn't get ... and exactly how they chose those accounted for the differences in response and performance between stocks tracking the same index.

I don't grok ETFs, so I have to refer you to others for how they handle oversubscription. I would have expected something similar.

If everyone wants to buy the AAA ETF, the manager just issues new shares based on the actual S&P 500 stocks. That keeps the ETF price stable since there’s always fresh supply. Arbitrageurs keep an eye on this process, which is why ETFs don’t spike like regular stocks.