Also, when an ETF price is fluctuating, is it moving from two sources? i.e. the underlying individual stocks and the traders bidding for the ETF. If so how do these two competing elements work out?

Tom H answered:
Micheal K is correct, but some of the other details are interesting. To answer your question directly, "generally yes" and "yes."

If the ETF were perfect, its share price would exactly reflect the underlying index value. The extent to which they differ is called the "tracking error." You can look up tracking error stats for the Barclays iShares ETF's and maybe some others.

While the average error is pretty small, there are brief periods of time where the error can be 1% or 2% even for some of the bigger funds. For smaller funds with lower trading volume you can see 3 or 4% errors. If the total asset value of a fund is less than $100M, you should be extra cautious.

What keeps the error low? It is the big banks and brokers buying and selling ETF shares on the open market, packaging them as "creation units" of 10,000 ETF shares each, and trading the creation units for the individual company stocks. Finally, the individual stocks are traded for cash.

Why do the big boys do this? To make make money. If there is no tracking error, then there is no profit motive.

I own a sizable amount of IVV which is an S&P500 ETF with total assets in the 10's of $Billions range. In the craziness of the last few weeks there have been rapid sell-offs in just the last 30 seconds of the market. I have seen my IVV close the trading day with a tracking error of 0.75%. Of course, the next day it will re-adjust itself.

My rule of thumb is: never buy an ETF when its price is rising, and never selling it when its price is falling. In those cases the tracking error is working against you.

A final interesting point. Suppose a Korean ETF gets hammered during US trading hours. S. Korea's market is closed. How bad is the tracking error in this case? You might be able to pick up several percentage points of tracking error in your favor!

Michael K answered:
Your answer is, it depends. An ETF can issue more shares and it can allow shares to be cashed in. So, the number of shares does not stay constant over the life of the fund. But every time a share is bought or sold, it does not NECESSARILY increase or decrease the total number of shares outstanding (since it could be an exchange between a seller and a buyer of existing shares).

Because large institutional investors are able to exchange shares of an ETF for the underlying shares of stock in the fund, it is rare for the price of an ETF to be very far from the price of the underlying stocks.
I hope that helps.

Pitty T answered:
ETFs are cheaper than mutual funds. ETFs have very low annual expenses, nearly 20 basis points or 0.2% less. As against this, actively managed mutual funds show average expenses exceeding 135 basis points (1.35%). This does not include the extra 2% - 5% as loads, 12(b)-1 marketing fees, transactions costs, and soft dollar expenses mutual funds, passed on to you but never informed, except in very fine print that nobody cares to read.