The biggest advantage to ETFa other than their low cost is their transparency, For those indices using publicly available indices one can know exactly what the portfolio owns at any time. Even if the fund falls into the category of those "smart beta" funds such as Powershares PRF and PRFZ the fund still has a selection process that doesn;t change a clear definition of where in the market it invests.
This is not the case for actively managed mutual fund. This is very often the case even if he fund is to target a particular sector of the market such as small cap stocks. If one looks at the prospectus the manager often has discretion to invest outside the category (in this case small caps) for a percentage or even at times all of the portfolio. The article notes
The WSJ has an excellent article pointing how hard it is both to know what an actively managed mutual fund owns..it is even more difficult to "get under the hood" to know more about the strategy the manager is pursuing.
Top 10 lists are fun, easily digested and make people feel they are in the know. But a mutual fund’s list of top 10 holdings isn’t as satisfying.That is because the listed holdings aren’t necessarily still the fund’s favorites.A mutual fund is permitted to delay reporting portfolio holdings for as long as 60 days following the end of its fiscal quarter. In practice, many funds publish a complete list of their holdings on their websites 30 days after the quarter ends. Top 10 holdings and their percentage weightings in the portfolio frequently are made available online monthly with a 10- or 15-day lag.s are frequently out of date, and don’t say much about overall strategy....
top 10 holdings are just a starting point to evaluate a fund.“It’s only one piece of a broader puzzle as to how that fund is managed,” says Mr. Rotblut.The article also notes:
Fitting the pieces together requires digging into a mutual fund’s inner workings: long-term results, manager tenure and expenses. Investors also should be aware of the four P’s that investment advisers tend to consider when selecting funds for clients—investment process, the people managing the fund, their performance record and the reputation of the fund’s parent company....
Research shows that for stock funds, factors including sector allocation and style consistency influence returns more than the selection of individual stocks. In other words, in evaluating a fund, where and how a manager invests is more telling than what’s being bought and sold.The style consistency problem is eliminated with most ETFs. Sector allocation is of course eliminated in the case of style specific ETFs or in the case of bonds bond ETFs designed to invest based on a particular index either broad bond market or specific maturity or type of bond.
Other factors mentioned are more or even fully transparent with ETFs
Fitting the pieces together requires digging into a mutual fund’s inner workings: long-term results, manager tenure and expenses. Investors also should be aware of the four P’s that investment advisers tend to consider when selecting funds for clients—investment process, the people managing the fund, their performance record and the reputation of the fund’s parent company.
For ETFs long term results are far more useful because the methodology for the ETF is consistent for an actively managed fund past results say virtually nothing about future results especially since in many cases the manager changes over the period reported. Fees are transparent for ETFs and actively traded mutual funds...although there are ETFs available with fees far lower than active funds many below .10%.
Portfolio turnover—a measure of trading activity—is also telling. If a fund’s turnover is greater than 50% annually, top holdings might shift even more rapidly. This is especially the case with small-cap and midcap stock funds, which tend to see more trading.Turnover below 50% indicates that management is being more patient and holding on to stocks longer.Portfolio turnover in an ETF is limited to portfolio rebalances and in virtually no cases does it come close to 50%.