Understanding the Role of ETFs in Passive Equity Investing

In recent years, Exchange-Traded Funds (ETFs) have become increasingly popular among investors seeking passive equity investment strategies. ETFs combine the benefits of mutual funds with the trading flexibility of individual stocks. As an investment manager, consider the implications of using ETFs within an investor's equity portfolio. Discuss the advantages and potential drawbacks of incorporating ETFs into a passive investment strategy, while also considering factors such as liquidity, cost structure, tracking error, and diversification.