ETF Advantages over Mutual Funds

There is a minimal management fee since there is minimal intellectual input, trading and less administrative requirement (e.g. no need for shareholder accounting at the fund level.

There are no 12b-1 fees for distribution costs, advertising and trailing commissions to the selling brokers.

There is a minimum of capital gains distributions since the fund hardly trades. Hence, there are no unexpected year-end tax consequences.

The typical mutual fund holds up to 5% or 10% of its assets in cash to meet share redemptions while the ETF holds virtually none. This money is not working for you.

For a long-term holder, there is no cost for the portfolio turnover so common to all conventional mutual funds, nor do you share the costs in buying and selling holdings to accommodate new investors or those who are liquidating.

Your cost basis in the fund is what you paid for your shares. You don't inherit unrealized gains and losses accumulated from prior years or prior holders and distributed to whoever holds the shares at year end. You also don't end up with taxable gains in years when your fund has declined in value.

Shares can be bought and sold anytime of the day during trading hours. Hence, you don't have to wait until 4PM or the next day to find out what you paid for the shares. This can be important in unstable markets.

You are not exposed to the trading styles, personal agenda and human fallability of the fund manager.

ETF shares can be bought and sold anytime with limit, stop, and market if touched orders. Mutual funds can only be bought at days end and at end of market prices (unless you're a friend of the management, in which case the books may be kept open a little longer, per Elliot Spitzer.)

Many ETFs have put and call options as well as being able to be bought on margin and sold short. These would allow an investor to hedge his exposure in a fund holding rather than buy or sell his holdings and thereby generate long term or short term capital gains.

The investor always knows what the fund holds. Conventional fund holdings are not transparent, being reported only quarterly at most. Hence, when a Merk- Vioxx type situation comes up, you may not know your exposure for three months. Also, you aren't exposed to short-term portfolio style changes a manager may make between reporting periods to try to make up performance shortfalls.