What is a primary benefit of choosing an exchange-traded fund (ETF) over investing in an individual stock?

• A. ETFs guarantee higher returns than individual stocks.
• B. ETFs provide instant diversification across multiple securities.
• C. ETFs are not subject to market risk.
• D. ETFs can only be purchased at the end of the trading day.

Answer: (B)

Verified step by step guidance

1. Understand the concept of an exchange-traded fund (ETF). An ETF is a type of investment fund that holds a collection of securities, such as stocks, bonds, or commodities, and trades on an exchange like a stock.
2. Compare ETFs to individual stocks. While individual stocks represent ownership in a single company, ETFs provide exposure to multiple securities, offering diversification.
3. Evaluate the benefits of diversification. Diversification reduces the risk associated with investing in a single security by spreading investments across various assets, which is a key advantage of ETFs.
4. Clarify misconceptions in the options provided. ETFs do not guarantee higher returns, are subject to market risk, and can be traded throughout the trading day, unlike mutual funds which are priced at the end of the day.
5. Conclude that the primary benefit of ETFs over individual stocks is their ability to provide instant diversification across multiple securities, reducing risk and offering broader market exposure.