ETFs have several advantages over traditional open-end funds. The four most prominent advantages are trading flexibility, low cost, operational transparency, and tax benefits.
Traditional open-end mutual fund shares are traded only once per day after the markets close. All trading is done with the mutual fund company that issues the shares. Investors must wait until the end of the day when the fund net asset value (NAV) is announced before knowing what price they paid for new shares when buying that day and the price they will receive for shares they sold that day. Once-per-day trading is fine for most long-term investors, but some people require greater flexibility.
ETFs are bought and sold during the day when the markets are open. The pricing of ETF shares is continuous during normal exchange hours. Share prices vary throughout the day, based mainly on the changing intraday value of the underlying assets in the fund. ETF investors know within moments how much they paid to buy shares and how much they received after selling.
The nearly instantaneous trading of ETF shares makes intraday management of a portfolio a snap. It is easy to move money between specific asset classes, such as stocks, bonds, or commodities. Investors can efficiently get their allocation into the investments they want in an hour and then change their allocation in the next hour. That is not something I recommend, but it can be done.
Making changes to traditional open-end mutual funds is more challenging and can take several days. First, there is typically a 2:00 pm Eastern standard time cutoff for placing open-end share trades. That means you do not know what the NAV price will be at the end of the day. It is impossible to know exactly how much you will receive when selling shares of one open-end fund or know how much you should buy of another open-end fund.
The trade order flexibility of ETFs also gives investors the benefit of making timely investment decisions and placing orders in a variety of ways. Investing in ETF shares has all the trade combinations of investing in common stocks, including limit orders and stop-limit orders. ETFs can also be purchased on margin by borrowing money from a broker. Every brokerage firm has tutorials on trade order types and requirements for borrowing on margin.