If I wanted long-term exposure to the S&P 500 then I would indeed do that. I have bought and shorted SPY (which has a fee attached) as a part of short-term pairs trades.
My point is simply that for years, fund managers such John Bogle have made a big deal about the fact that an efficient market doesn't allow stock picking funds to beat the cheaper index funds, etc, etc. True enough, but the next logical step is to drop the index funds and manually reproduce their trivial work.
Someday, a smart brokerage is going to offer a service to do this automatically, with cut-rate commissions. This would save people billions and billions of dollars.
SPY is the largest ETF, and follows the S&P 500, which is why I mentioned it. I trade lots of ETFs. Short term, they allow individuals to use hedge fund-style strategies. Long-term, they are essentially the same as mutual funds. Very-short-term, they allow quants to make money on arbitrage. There is no good reason for their existence, honestly.
When you say things like "Very-short-term, they allow quants to make money on arbitrage.", it makes me think you really don't understand the role of market makers, proprietary traders, or quants.
Let me ask you a very basic question: why do market makers (the people you trade against when you buy or sell SPY) make money? They aren't stealing from you. They are providing you the service of liquidity. Market makers connect people who want to buy/sell now with people who want to buy/sell in the future. In the interim, they take on the risk of holding that position that you didn't want. On average, they are compensated for that risk.
The way you say "they allow quants to make money on arbitrage" implies that the quants are just "extracting money" from the markets without doing any good at all. This is the complete opposite of the truth, and more people need to understand this.
If you don't derive value from them, why do you trade them?
You are absolutely right. ETFs are basically mutual funds, but with greater liquidity and lower fees. That's the reason for their existence - mutual funds, but better.
