How does an ETF differ from a traditional mutual fund?

The distinction that sets ETFs apart from traditional mutual funds is that ETFs are traded on stock exchanges like regular stocks. This aspect allows investors to buy and sell shares of an ETF throughout the trading day at market prices, which can fluctuate just like individual stock prices. This real-time trading offers flexibility and can provide more opportunities for strategic buying and selling compared to mutual funds, which generally can only be bought or sold at the end of the trading day at the net asset value (NAV).

Additionally, the structure of ETFs often leads to lower management fees compared to traditional mutual funds, making them a cost-effective investment option. The notion that ETFs can only hold stocks is incorrect, as many ETFs also hold bonds, commodities, and other asset classes. The idea that ETFs are not subject to market fluctuations contradicts their nature, as their prices change in response to supply and demand in the market. Thus, the correct choice highlights the fundamental characteristic of ETF trading that distinguishes it from mutual funds.