ETFs have several clear advantages over traditional mutual funds.

ETFs offer more flexibility.
ETFs trade throughout the day, so you can buy and sell them when you want. When you buy a mutual fund, in contrast, you're buying at the end-of-day NAV, no matter what time of day you place your order.

The annual expenses of ETFs are considerably lower than most mutual funds'.
SPDRs, for example, reduced their annual expense ratio to just 0.12% in 2000. At that time, iShares' annual expense ratios ranged from 0.09% for iShares S&P 500 Index, to 0.99% for several of its iShares MSCI Series offerings (formerly known as WEBS).

On a $10,000 investment, you'd save $9 a year by choosing iShares S&P 500 Index Fund over Vanguard 500 Index Fund VFINX. (The latter charges just 0.18% per year for its services, but on small accounts Vanguard also levies an annual fee of $10, which increases the iShares' edge.)

Because of their structure, ETFs should be more tax-friendly than mutual funds.
With a regular mutual fund, investor selling can force managers to sell stocks in order to meet redemptions, which can result in taxable capital-gains distributions being paid to shareholders. In contrast, most trading in ETFs takes place between shareholders, shielding the fund from any need to sell stocks to meet redemptions. Furthermore, redemptions made by large investors are paid in-kind, again protecting shareholders from taxable events.

All of this should make ETFs more tax-efficient than most mutual funds, and they may therefore hold a special attraction for investors in taxable accounts. Keep in mind, however, that ETFs can and do make capital-gains distributions, as they must still buy and sell stocks to adjust for changes to their underlying indexes.

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