What is an Exchange-Traded Fund (ETF)?

An Exchange-Traded Fund (ETF) is best defined as a marketable security that tracks an index or a basket of assets. This creates a mechanism that allows investors to gain exposure to a range of investments through a single vehicle. ETFs are typically traded on stock exchanges, similar to individual stocks, which means they can be bought and sold throughout the trading day at market prices.

This structure provides liquidity and flexibility that traditional mutual funds do not offer, as those are usually only priced and traded at the end of the trading day. Furthermore, ETFs often hold a diversified portfolio of securities, which can include stocks, bonds, or other financial assets, and can track various indices such as the S&P 500 or thematic baskets of assets.

The other choices are not accurate representations of what an ETF is or how it operates. For instance, while mutual funds do pool funds from many investors, they do not usually trade on an exchange; this distinguishes ETFs from mutual funds. This inherent structure and trading mechanism make ETFs a popular investment choice among both individual and institutional investors.