ETFs also offer a potential tax adv

ETFs also offer a potential tax advantage over mutual funds. When large numbers of mutual fund investors redeem their shares, the fund must sell securities to meet the redemptions. This can trigger capital gains taxes, which are passed through to and must be paid by the remaining shareholders. In contrast, when small investors wish to redeem their position in an ETF, they simply sell their shares to other traders, with no need for the fund to sell any of the underlying portfolio. Large investors can exchange their ETF shares for shares in the underlying portfolio; this form of redemption also avoids a tax event.
ETFs are often cheaper than mutual funds. Investors who buy ETFs do so through brokers rather than buying directly from the fund. Therefore, the fund saves the cost of marketing itself directly to small investors. This reduction in expenses may translate into lower management fees.
There are some disadvantages to ETFs, however. First, while mutual funds can be bought at no expense from no-load funds, ETFs must be purchased from brokers for a fee. In addition, because ETFs trade as securities, their prices can depart from NAV, at least for short periods, and these price discrepancies can easily swamp the cost advantage that ETFs otherwise offer. While those discrepancies typically are quite small, they can spike unpredictably when markets are stressed. Chapter 2 briefly discussed the socalled flash crash of May 6, 2010, when the Dow Jones Industrial Average fell by 583 points in seven minutes, leaving it down nearly 1,000 points for the day. Remarkably, the index recovered more than 600 points in the next 10 minutes. In the wake of this incredible volatility, the stock exchanges canceled many trades that had gone off at what were viewed as distorted prices. Around one-fifth of all ETFs changed hands on that day at prices less than one-half of their closing price, and ETFs accounted for about two-thirds of all canceled trades.
At least two problems were exposed in this episode. First, when markets are not working properly, it can be hard to measure the net asset value of the ETF portfolio, especially for ETFs that track less liquid assets. And, reinforcing this problem, some ETFs may be supported by only a very small number of dealers. If they drop out of the market during a period of turmoil, prices may swing wildly.