Mutual funds vs ETFs – the differences and which may be right for you

You may have recently heard about exchange-traded funds (ETFs) as an alternative to investing in mutual funds.

ETFs have become increasingly popular investments with Canadians. In fact, ETFs are gaining assets at an annual rate of 28% at the end of 2017, compared to just 10.3% for mutual funds.²

But how do you determine which is best for you?

What are mutual funds and ETFs?

Both are pools of investments managed by professional fund managers. They allow you to invest in a wide variety of stocks and bonds so you can diversify your investments instantly.

ETFs trade in real time like stocks, while mutual funds are valued once, at the end of the business day and switching investments from one company to another takes two days in addition to the day a fund is bought or sold.

Both are popular investments with Canadians. The Investment Funds Institute of Canada (IFIC) reports that Canadian investors held $1.48 trillion in mutual funds as of Dec. 31, 2017.¹

According to the Canadian ETF Association (CEFTA), as of Dec. 31, 2017, Canadians have invested $145.75 billion in ETFs.²

With both mutual funds and ETFs, you can invest in a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA) or registered education savings plan (RESP). Both can also be held in non-registered accounts. 

With both, there are two ways to make money on the investment. One is from capital gains when you sell the fund for more than you paid for it. The second is with distributions.

How do the costs of mutual funds and ETFs compare?

If you’re a cost-sensitive investor, you may be attracted to the lower annual fees and no investment minimums offered by ETFs. Just remember that if you wish to invest small amounts of money regularly (such as with dollar-cost averaging strategy or pre- authorized contributions), frequent trading commissions can erode your returns, increasing the cost of your ETF investment.

Compared to ETFs, mutual funds typically come with minimum investment and higher expenses, such as management and operational fees. However, it’s important to remember that with those higher fees investors get the services of a manager who much more actively involved in the funds’ investment selection and management.

In Canadian Business, financial journalist Larry MacDonald notes, “The mutual fund vs. ETF debate often overlooks the fact that the cost of most mutual funds contains the cost of financial advice…so comparing the costs of ETFs to mutual funds is comparing apples to oranges.”³

If you can’t decide between mutual funds and ETFs based on their investment cost, consider what kind of investor you are. You can also talk to an investment representative who can help you determine what product is right for
you.

Investing in ETFs

The day trading flexibility of ETFs is ideal for some investors because they can trade anytime the market is open. If you're comfortable with more active trading on your account, maybe you’re cut out to invest in ETFs.

Investing in mutual funds

On the other hand, if you’re the kind of investor who desires less control and wants a simpler, more hands-off experience, combined with the guidance of a professional investment representative, maybe it’s mutual funds you’re after.

They suit people wanting their portfolio to be professionally managed. You can also easily set up automatic investments in fixed amounts towards your mutual funds – so you don’t have to remember to contribute each month.

As well, mutual funds offer additional series and structures that aren’t available in ETFs. These can provide you with regular cashflow, or invest your money more tax efficiently.

Still have questions?

It could be a combination of the two that’s right for your unique situation. An investment representative can help assess your goals, financial situation and risk tolerance and create an investment plan that helps you make the right choices.

¹Stats and FactsOpens a new website in a new window, The Investment Funds Institute of Canada

²Industry StatisticsOpens a new website in a new window, Canadian ETF Association

³Larry MacDonald, “I thought I wanted a mutual fund”Opens a new website in a new window, Canadian Business, Oct. 19, 2009

Make your investment decisions wisely. Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.

About us

Quadrus Investment Services Ltd. is a mutual fund dealer in Canada – and it’s one of the largest in this country. 

As of December 2016, we provide more than 3,770 investment representatives and their clients with access to a range of mutual funds and related services. 

Quadrus Investment Services Ltd. is the exclusive dealer for the Quadrus Group of FundsOpens in a new window.

Our mutual fund options, along with the advice and guidance of your investment representative, can offer you powerful investment choices based on your needs, lifestyle and goals.