Financial Industry Regulatory Authority (FINRA) Practice Exam

The correct choice for an investment fund specifically designed to be actively traded on exchanges like stocks is an exchange-traded fund (ETF). ETFs are structured to be bought and sold throughout the trading day on stock exchanges, similar to individual stocks. This allows investors to take advantage of price fluctuations in real time, which is not possible with traditional mutual funds that typically transact only at the end of the trading day. While a closed-end fund can also be traded on an exchange, its trading mechanics differ from that of ETFs. Closed-end funds issue a fixed number of shares, which can lead to trading at a premium or discount to their net asset value (NAV), while ETFs typically trade close to their NAV due to their mechanism of creation and redemption. Mutual funds do not trade on exchanges and are bought and sold at the end of the trading day, further highlighting the unique trading characteristics of ETFs. Exchange-traded notes (ETNs), while also traded on exchanges, are debt securities rather than investment funds and do not have the same structure or function as an ETF. Therefore, the distinction that makes ETFs the correct answer lies in their active trading capability on exchanges, akin to stocks.