Evaluating the Role of ETFs in Passive Equity Investing

The increasing popularity of Exchange-Traded Funds (ETFs) has reshaped the landscape of passive equity investing. Investors are drawn to ETFs due to their liquidity, diversification, and lower expense ratios compared to traditional mutual funds. Consider the implications of these characteristics on portfolio management decisions.

Discuss the advantages and disadvantages of using ETFs as the primary vehicle for passive equity investing. In your answer, be sure to incorporate aspects such as tracking error, tax efficiency, and trading costs. Additionally, evaluate how ETFs might impact the asset allocation decisions of an investor with a long-term investment horizon. Provide examples to illustrate your points.