When Canadians talk about investing, two names come up more often than any others: ETFs and mutual funds. Both offer diversification, professional management, and accessibility for a wide range of investors. But their structures and costs differ enough to make one or the other a better fit depending on your goals.
This article explores how ETFs and mutual funds work, what sets them apart, and how investors in Canada can choose wisely between them.
Both exchange traded funds (ETFs) and mutual funds allow investors to pool their money to buy a mix of securities such as stocks or bonds. This shared structure gives individuals the ability to own a diversified portfolio without needing to buy every stock themselves.
A mutual fund is typically an open-end investment vehicle. Investors buy or redeem units directly from the fund company, usually at the end of the trading day. The fund’s manager adjusts holdings as money flows in or out.
An ETF, on the other hand, trades on a stock exchange just like a stock. Investors can buy and sell shares throughout the trading day, and the price changes based on market supply and demand. ETFs can be bought in brokerage accounts through the same platforms investors use to trade other securities.
These structural differences lead to variations in cost, tax treatment, transparency, and trading flexibility.
The biggest distinction between ETFs and mutual funds often comes down to cost. In Canada, mutual funds, especially actively managed ones, tend to have higher management expense ratios (MERs) than ETFs.
Mutual funds often include sales commissions, redemption fees, or trailing commissions that compensate advisors and distributors. ETFs generally have lower MERs because most are passively managed, tracking an index instead of relying on a team of analysts to select stocks. According to Wealth Professional Canada, ETF MERs can be as low as 0.05%, while mutual funds often range between 1.5% and 2.5%.
Several Canadian brokerages also offer commission-free ETF trading, making ETFs even more cost-effective for self-directed investors. Lower costs mean more of your money stays invested and compounds over time, which can significantly improve returns over the long term. [Wealth Professional]
Tax treatment is another major area where ETFs tend to outperform mutual funds. Because of how ETFs are structured, they often distribute fewer capital gains to investors.
When investors buy or sell ETF units, the transactions usually happen on the exchange between investors. This process limits the need for the fund itself to sell securities, reducing taxable events. ETFs can also use "in-kind" redemptions, where securities are swapped rather than sold, helping avoid realized capital gains at the fund level. Mutual funds are more likely to realize gains inside the fund when managers adjust portfolios, and those gains are passed to investors each year, even if the investor did not sell their own units.
For those holding investments in taxable accounts, this can mean ETFs create a lighter tax burden compared with mutual funds. [Money.ca]
ETFs offer flexibility that mutual funds simply cannot match. Because ETFs trade on stock exchanges, investors can buy and sell them at any time during market hours. You can use limit orders, stop orders, or margin trading, depending on your brokerage account features.
The price of an ETF fluctuates throughout the day, just like a stock. Investors always see real-time prices and can react immediately to market movements. Mutual funds, on the other hand, are priced only once daily at the net asset value (NAV) after markets close. All investors who transact that day receive the same end-of-day price.
This difference makes ETFs a better option for investors who want intraday liquidity and more control over trade timing. Mutual funds are better suited for long-term investors who prefer simplicity and do not need to trade frequently.
ETFs are generally more transparent than mutual funds. Most ETF issuers publish their full list of holdings every day, allowing investors to see exactly what is inside the fund.
Mutual funds typically report holdings on a quarterly or semi-annual basis, which means investors may not know what the fund currently holds at any given time. For those who care about specific sector exposure, concentration, or ethical screens, ETFs provide more clarity.
Mutual funds have traditionally been associated with active management. A portfolio manager and team analyze the market, select securities, and try to outperform a benchmark. This approach can be attractive for investors who believe in manager skill and are willing to pay higher fees for potential outperformance.
However, evidence shows that many active mutual funds underperform over the long term. Wealth Awesome notes that Canadian active equity funds have underperformed their benchmarks about 96% of the time over five years and 82% over ten years.
ETFs, on the other hand, are mostly passive, tracking indexes like the S&P/TSX Composite or S&P 500. This approach keeps costs low and performance more predictable relative to benchmarks. That said, the rise of actively managed ETFs is changing the landscape. These funds combine the cost and tax benefits of ETFs with the active oversight of traditional mutual funds.
Despite their higher costs, mutual funds remain useful in some scenarios.
They are ideal for investors who want a fully automated investment experience. Many mutual funds allow for automatic monthly contributions and automatic dividend reinvestment without the need to buy fractional shares. They also fit investors who prefer professional advice through a financial advisor or bank, since mutual funds are often integrated into managed account offerings. And for those investing primarily in registered accounts such as RRSPs or TFSAs, where taxes are deferred or sheltered, the tax efficiency advantage of ETFs becomes less important. [Canada Life]
The Canadian investment market continues to shift rapidly toward ETFs. As of 2024, Canadians held approximately $2.42 trillion in mutual funds and $518 billion in ETFs, according to TD Direct Investing. ETF assets are growing faster each year as investors become more cost-conscious and value transparency and control. This growth has encouraged more innovation in the ETF space. Firms like Avantis Investors now offer actively managed ETFs that bring professional insight to the ETF structure. Avantis describes its approach as combining "the aspects of indexing, such as low fees, broad diversification, and tax efficiency, with daily active oversight and holistic consideration of company valuations when selecting and weighting securities."
Choosing between ETFs and mutual funds depends on your priorities. If you value lower costs, transparency, and the ability to trade throughout the day, ETFs are likely the better fit. They are efficient, liquid, and ideal for long-term investors who prefer to minimize fees and taxes. If you want professional management, automatic contributions, or advice-driven solutions, mutual funds still have a place. They are convenient, easy to automate, and can suit investors who prefer not to manage their investments directly.
In many cases, the best approach is to use both. You can hold low-cost ETFs as your portfolio core and add select actively managed mutual funds or active ETFs where you believe professional expertise adds value.
While Avantis AI is not an investment provider, it plays an important role in helping investors and analysts make more informed decisions. Avantis uses artificial intelligence to turn regulatory and corporate filings from sources like SEDAR and the SEC into actionable insights. By doing so, it enables users to uncover trends, assess company risks, and identify opportunities faster. This kind of intelligence can support fund analysts, advisors, and investors who need to understand what is inside their ETFs or mutual funds and how those underlying companies are performing.
Avantis’ technology helps make the complex world of financial data more transparent, empowering professionals to make better decisions based on real, verifiable information. In summary, both ETFs and mutual funds have their strengths. For Canadians, ETFs increasingly represent the smarter, more cost-efficient path. But whichever you choose, understanding what you own and why you own it is key. With tools like Avantis helping to clarify the data behind investment products, investors have more power than ever to make informed, confident decisions.
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