Evaluating ETFs in Passive Equity Investing Strategies

It has been observed that Exchange-Traded Funds (ETFs) have significantly transformed the landscape of passive equity investing over the last two decades. With their increasing popularity among both retail and institutional investors, ETFs provide investors with an effective vehicle for achieving market exposure while maintaining cost efficiency.

Consider the following scenario: An investment committee at a mid-sized asset management firm is debating whether to implement an ETF-based investment strategy or to continue their traditional index fund approach for a new equity portfolio aimed at long-term capital appreciation.

Critically analyze the advantages and disadvantages of utilizing ETFs in this context compared to traditional index funds. In your response, consider factors such as liquidity, cost structure, tax efficiency, tracking error, and operational considerations. Additionally, provide recommendations for the investment committee on the selection of an appropriate ETF strategy that aligns with their investment objectives, risk tolerance, and investment horizon.