What is an 'ETF' (Exchange-Traded Fund)?

An Exchange-Traded Fund (ETF) is accurately described as a fund that is traded like a stock and holds multiple assets. This structure allows investors to buy and sell shares of the fund on an exchange throughout the trading day, similar to individual stocks. ETFs typically aim to track the performance of a specific index, sector, commodity, or basket of various assets, providing diversification within a single investment.

The key characteristic of an ETF is its ability to be traded on the stock market, which adds liquidity and flexibility for investors compared to traditional mutual funds that trade only at the end of the trading day. Additionally, ETFs can hold a variety of asset types, including stocks, bonds, and commodities, making them versatile investment vehicles.

The other options describe different financial instruments that do not capture the essential features of an ETF. For instance, a type of mutual fund that cannot be traded does not apply to ETFs, as they do provide trading ability. Similarly, a bond issued by government entities and a fixed-rate investment with no trading flexibility do not pertain to the nature or functioning of an ETF, reinforcing why the choice that describes ETFs accurately is the one related to trading and asset diversity.