Exchange Traded Funds (ETFs) are index funds traded in the US on the American Stock Exchange, the New York Stock Exchange, and the NASDAQ exchange. In Australia the only equivalent of an ETF that I'm aware of is the Commonwealth Diverfified Share Fund (CFD) which is a good proxy for the All Ordinaries Index. ETFs are generally a low-cost means the gain exposure to the entire stockmarket, or a particular market segment, compared to investing in an actively managed fund. Although actively managed funds all have a goal of outperforming the relevant benchmark (usually an index), they often do not add more outperformance than they cost in higher management fees. Historical fund performance tends to have little predictive power, so trying to determine which actively managed funds will perform better than an index fund isn't easy. For that reason I think investing in ETFs can form a good "core" to any portfolio. Information about available US ETFs can be found at etfguide.com
ETFs can also have some other advantages compared to actively managed funds - one in particular is tax-efficiency. When you buy units in an actively managed fund you may find that you have a capital gain reported in the annual statement for the fund, even if the fund unit price is lower than when you bought into the fund. This is because funds may sell assets that they've held for a long time and realise a capital gain.
ETFs generally track the relevant index fairly closely, but there can be small difference between the ETF stock movements and the movements in the relevant index. For example, CDF stock price is compared to the All Ordinaries Index below: