Which statement about ETFs is true?

• A. ETFs are not tradable on the stock exchange
• B. ETFs are designed to track performance of an index, commodity, bond or basket of assets
• C. ETFs are open-ended funds that always trade at NAV
• D. ETFs cannot be redeemed in the market

Answer: (B)

ETFs are funds listed and traded on stock exchanges that aim to mirror the performance of a benchmark such as an index, a commodity, a bond index, or a basket of assets. That purpose—that exposure to a specific benchmark with the trading flexibility of a stock—is what defines them. Because they track a benchmark, their primary goal is to replicate that performance rather than attempt active management. On the market, the trading price of an ETF reflects supply and demand and can differ from the fund’s actual net asset value, so it might trade above or below NAV. While they are open-ended funds, they do not always trade exactly at NAV; creation and redemption with authorized participants help align price with NAV, but intraday prices can still diverge. And ETF shares can be exchanged in the market; there is a redemption mechanism via authorized participants rather than a direct redemption by retail investors for the underlying assets in the market. So the true statement is that ETFs are designed to track the performance of an index, commodity, bond or basket of assets.