What characterizes an exchange-traded fund (ETF)?

An exchange-traded fund (ETF) is characterized by its ability to be traded on exchanges just like individual stocks. This means that investors can buy and sell shares of an ETF throughout the trading day at market prices, allowing for greater liquidity and flexibility compared to mutual funds, which only trade at the end of the trading day at the net asset value.

ETFs offer diversification by pooling investor funds to invest in a collection of securities, which can include stocks, bonds, or commodities. Their trading flexibility is one of the key features that appeal to investors, as they can execute trades quickly and take advantage of price movements in real time.

The other options describe incorrect characteristics. A governmental bond is a fixed-income security, not an ETF. While some ETFs can be long-term investments, they do not require long-term holding without trading; many investors use ETFs for short-term trading strategies. Lastly, ETFs are available through various brokerages, not solely through mutual fund companies. This accessibility adds to their popularity among individual investors and traders alike.