What is an exchange-traded fund (ETF)?

An exchange-traded fund (ETF) is correctly defined as a type of fund that owns underlying assets and trades on stock exchanges, similar to stocks. This definition highlights two key characteristics of ETFs: their structure and the manner in which they are traded.

First, ETFs hold a portfolio of assets, such as stocks, bonds, or commodities, allowing investors to gain diversified exposure to these underlying assets without needing to purchase each one individually. This makes ETFs a popular choice for investors seeking to manage risk while still participating in market movements.

Second, the ability to trade on stock exchanges is a significant feature of ETFs. Unlike mutual funds, which are typically bought and sold at the end of the trading day at the net asset value (NAV), ETFs can be traded throughout the day at market prices, much like individual stocks. This trading flexibility allows investors to execute trades in reaction to market conditions and provides opportunities for price movements.

Overall, understanding that ETFs combine the attributes of ownership of underlying assets with the liquidity and trading efficiency of stocks is critical for grasping their role in modern investing.