What mechanism allows ETFs to provide broad diversification with a single trade?

• A. Tracking an index or basket of assets
• B. High leverage
• C. Frequent trading
• D. Active stock picking

Answer: (A)

Diversification in a single trade comes from ETFs being designed to track an index or a basket of assets. When you buy an ETF, you purchase a share of a fund that holds many securities, so you gain exposure to all those holdings at once instead of selecting individual stocks. The fund’s objective is to mirror the performance of its underlying index or basket, giving you diversified exposure across the represented assets. The other options don’t achieve that instant breadth: high leverage increases risk and does not expand the number of assets you own; frequent trading is just a trading pattern and doesn’t ensure broad diversification; active stock picking focuses on a few selected stocks rather than a broad mix. For example, a broad-market ETF tracking the S&P 500 includes hundreds of companies, all accessed with a single trade.