Which of these statements best describes an exchange-traded fund (ETF)?

The statement describing an exchange-traded fund (ETF) accurately characterizes its primary function of allowing investors to buy and sell shares just like stocks on an exchange. This means that investors can trade ETFs throughout the trading day at fluctuating market prices, similar to how individual stocks are traded.

ETFs are designed to track the performance of a specific index, sector, commodity, or asset class, while offering flexibility and liquidity to investors. They can be composed of a diverse range of assets, including stocks, bonds, or other securities, which adds to their appeal.

Understanding this operational characteristic is crucial for grasping how ETFs function as investment vehicles that combine the diversification benefits of mutual funds with the trading ability of individual stocks. The other options inaccurately describe ETFs by limiting their trading capabilities, investment focus, or suggesting unrealistic guarantees of returns.