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The definition of an exchange-traded fund (ETF) is innocent and broad. Simply put, an ETF is a type of investment fund that is traded on a stock exchange. I guess the clue is in the name. It’s an important distinction, though, as unit trusts are not traded on exchanges.

Passive ETFs can be traced back to 1993, when investment firm State Street launched the SPDR (“Spider”) S&P 500 ETF in the US. A passive ETF tracks an index and gives investors a way to obtain broad market exposure with a single, low-cost investment. This is critical in any wealth-creation strategy, as even the most seasoned stock pickers use ETFs to introduce “beta” (the market return) into a portfolio. They strive for “alpha” (outperformance of the market) on top of this...

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