ETFs (Exchange Traded Funds) are nothing but a diversified basket of stocks, which are passively managed (fixed composition), and where NO FUND MANAGER tinkers with the positions, or trades in & out of positions.
ETF Types: These can be sector based, like Auto, FMCG, Banking, Pharma, Energy etc., or could be Market Cap based, like Top 50, Top 100, Next 50 and so on. Categorizing them by Market Cap defines your risk/reward profile, like an ETF based on the Top 50 market cap companies, could be safer vs. the Next 50, and the more you go down towards Mid-Caps & Smaller Caps. And within the Top 50 region, there could be literally 100s of Mutual Funds (having little bit of variations), but only 1 ETF (like India's NIFTY or NIFTY50), and their risk / reward profiles will be similar.
vs. Mutual Funds: It has been observed historically that Mutual Fund managers, using too much discretion vs. the markets, tend to lag behind their benchmarks. For these reasons, ETF investing has become quite popular in the US markets, with ETF's AUM crossing $4Tn (vs. the size of US GDP at $20Tn), and are incrementally becoming popular in the rest of world markets as well.
Fees: Mutual Funds can charge fees totaling 2 - 3% of the investment (upfront), sometimes also called Total Expense Ratios (TER), and these can add up to a lot over the long runs, or for big investments. On the other hand, passive ETFs typically charge 0.1% fee (NEGLIGIBLE), both in the US & Indian markets.
For a quick perspective:
Investing Rs. 3Lakhs in a MF for 20Years (= Rs. 60Lakhs) can incur fees of Rs.1,20,000 ... vs. only Rs. 6,000 in a low cost ETF.
Smart Products: Further, there are really no smart products available in the Mutual Funds. You just hope for the Fund Manager's discretion to generate a little out-performance vs. the markets (ETFs), which some years can happen, & some year may not happen, depending on a lot of factors beyond their control. And other than that there are really no smart products available. Whereas in the ETF world, there are ABSOLUTELY very very smart products available, like the Leveraged-ETFs or the Inverse-ETFs, which can multiply EXPONENTIALLY in the long runs, just as designed. For example, if the base ETF multiplies 2x in 5-7 years, a 3x-Leveraged ETF on that would mulitply 8x in that time. Further, if the base ETF multiplies 3x in 10-15 years, a 3x-Leveraged ETF can multiply 27x. These numbers are NOT ASSUMPTIONS, and we have actual proof of concepts during the long bull run of 2009-2018, where some of the base ETFs have multiplied 3 - 4x in 9 years. Refer to Blog#3 (Exotic-ETFs) or the paid Content Videos more details.