ETFs trade on an exchange like a stock, thus they have similar liquidity and investors can trade them throughout market hours.
ETFs disclose their holdings daily. Passive ETF holdings should reflect the index to which they are tethered. Active ETFs are similarly transparent and required by the SEC to disclose the holdings everyday. Mutual funds are not required to disclose their holdings daily, and stocks are naturally transparent as a single security.
ETFs are packaged and sold as a unique collection of securities. Holding one ETF could offer an investor exposure to hundreds of securities, instead of just buying and selling individual stocks and bonds.
The ETF creation and redemption process, which uses in-kind transfers of securities, makes index ETFs relatively more tax efficient when compared to mutual funds and stocks. Mutual funds are taxed when a manager sells securities within the fund and a capital gain is distributed. A tax must be paid on a stock every time it is sold.
ETF expense ratios generally are lower than mutual funds. According to Morningstar Research, the average ETF expense ratio in 2014 was 0.44%, which compares to 1.25% the average mutual fund charges. Compared to buying single stocks, mutual fund and ETF investors bear their pro rata share of the fund’s brokerage cost but do not pay the full brokerage fees for several individual stocks to gain broader exposure to a segment of the market.