Choosing the right investment vehicle is one of the most important financial decisions Canadians face. For decades, mutual funds were the go-to choice for everyday investors, but in recent years exchange-traded funds (ETFs) have surged in popularity. Both options give you access to a diversified basket of investments, yet they work differently, and the choice you make can have a big impact on your long-term returns.
In this guide, we’ll break down the key differences, advantages, and drawbacks of mutual funds and ETFs in Canada—so you can make a smarter decision about where to put your money.
What Is a Mutual Fund?
A mutual fund pools money from many investors and is managed by a professional fund manager. These managers use their expertise to select stocks, bonds, or other assets with the goal of achieving growth or generating income.
- Accessibility: Most banks in Canada offer mutual funds, making them easy to buy through your financial institution.
- Management style: Often actively managed, which means a team makes day-to-day decisions about what to buy and sell.
- Cost: Investors pay a Management Expense Ratio (MER), which typically ranges from 1.5% to 2.5% annually in Canada—much higher than ETFs.
📌 Example: If you invest $10,000 in a mutual fund with a 2% MER, you’ll pay about $200 a year in fees, regardless of how the fund performs.
What Is an ETF?
An exchange-traded fund (ETF) is similar to a mutual fund in that it holds a diversified collection of investments. The key difference is that ETFs trade on stock exchanges, just like individual stocks.
- Accessibility: You need a brokerage account (such as Questrade, Wealthsimple Trade, or your bank’s direct investing platform) to buy and sell ETFs.
- Management style: Many ETFs are passively managed, tracking indexes like the S&P/TSX Composite or S&P 500.
- Cost: ETFs generally have much lower MERs, often 0.05% to 0.50% annually, making them highly cost-efficient.
📌 Example: On a $10,000 investment in an ETF with a 0.1% MER, you’d pay only $10 a year in fees—significantly less than a mutual fund.
Key Differences Between Mutual Funds and ETFs
| Feature | Mutual Funds | ETFs |
|---|---|---|
| Purchase Method | Through banks or advisors | Through brokerage platforms |
| Management Style | Usually active | Usually passive (but some are active) |
| Fees (MERs) | 1.5%–2.5% | 0.05%–0.5% |
| Trading Flexibility | Priced once daily | Traded throughout the day |
| Minimum Investment | Often $500–$1,000+ | As low as the price of one share |
Cost Comparison: The Fee Factor
The biggest differentiator between mutual funds and ETFs in Canada is fees.
- Over a long period, even a 1–2% difference in fees can drastically reduce your returns.
- According to Morningstar research, the MER of Canadian mutual funds is among the highest in the world, while ETFs are among the lowest.
💡 Tip: Always check the fund’s prospectus or ETF fact sheet for MER and trading costs before investing.
Liquidity and Accessibility
- Mutual Funds: Orders are processed once per day, after markets close. This means you can’t react instantly to market movements.
- ETFs: Since they trade on exchanges, you can buy or sell anytime during market hours, which gives you more flexibility.
If you’re a hands-off investor who doesn’t care about intraday trading, mutual funds might suit you. If you prefer more control, ETFs are the way to go.
Tax Considerations in Canada
Both mutual funds and ETFs are eligible for tax-sheltered accounts like RRSPs and TFSAs. However, outside registered accounts, taxes can differ:
- Mutual Funds: May generate capital gains distributions even if you don’t sell your units, creating unexpected tax bills.
- ETFs: Tend to be more tax-efficient, as their structure allows them to minimize taxable events.
For high-income earners investing in taxable accounts, ETFs often provide a more efficient option.
Which Is Better for You?
The answer depends on your investment style, experience, and goals.
- ✅ Choose Mutual Funds if:
- You want professional active management.
- You prefer buying directly through your bank or advisor.
- You don’t mind paying higher fees for a hands-off approach.
- ✅ Choose ETFs if:
- You’re comfortable using an online brokerage.
- You want lower costs and tax efficiency.
- You prefer flexibility and transparency in your investments.
Real-Life Scenarios
- Beginner Investor (Age 25, just starting):
- ETFs are a cost-effective way to build wealth long-term. Robo-advisors in Canada (like Wealthsimple) make it easy.
- Retiree (Age 65, seeking stability):
- Actively managed mutual funds with a conservative focus may feel safer, though low-risk bond ETFs can also work.
- Busy Professional (Age 40, limited time):
- A mix: core holdings in ETFs for low-cost growth, with a few actively managed mutual funds for diversification.
Final Thoughts
Both mutual funds and ETFs can play a role in a well-diversified portfolio. The right choice depends on your comfort with technology, your tolerance for fees, and your investment goals.
If you’re just getting started, ETFs may give you a cost advantage. If you want more guidance and prefer a hands-off approach, mutual funds can still make sense—just be mindful of the fees.
💡 Pro Tip: Many Canadians benefit from a blended approach: using low-cost ETFs as the foundation of their portfolio while adding select mutual funds for specific goals or strategies.
