You might also be interested in Advantages and Disadvantages of Investing In ETF’s

Now first thing is what is ETF. Here is a definition from various sources

Exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. So you can classify it as security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.

An ETF combines the valuation feature of a mutual fund, which can be purchased or redeemed at the end of each trading day for its NAV, with the trading feature of a stock, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. So now we have 2 questions.

How do they differ from Stock?

When you invest in Stock you buy shares of one company but for funds you buy the part of many companies stock and for ETF the same hold true.

How are they different from Index Fund?

The biggest problem with Mutual Fund ( Also known as Index Fund ) is you do not have chance to trade and at the time of redeeming it get the NAV of today or tomorrow depending on the time of your submission of your redemption request but for ETF as its traded you can get NAV better than todays NAV as well.

Now are ETF better than Normal Funds?

They are not better but are designed more as a short term fund that can have several stocks that may mean nothing in the long term as with mutual funds that are designed for long term investing.