In my opinion, the best option would be D. Attach the fragment to sentence (1). We could attach this fragment to the sentence (1) by adding a dash between them. If we wanted to make a standalone sentence of this fragment, we would have to add both a subject and a verb to it (e.g. It is the most popular purebred breed in the United States, in fact). If we wanted to attach the fragment to the sentence (3), we would have to add a subject and a verb to it, and make a compound sentence, using a coordinator - as it would have two subjects and predicates (e.g. It is the most popular purebred breed in the United States, and/whereas/while the second most popular breed is the Yorkshire terrier.)
