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February 25, 2019

Mutual Funds vs ETFS: Which Is Better For Canadians?

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Dan Kent

February 25, 2019

Mutual funds and exchange-traded funds (abbreviated to ETFs) are often lumped into the same broad investment category as a safely diversified and a readily accessible way to invest, particularly for those who may be new to the travails of sensible and informed investment.

There are significant differences though, with a range of important implications, both for your financial position and the manageability of your financial life.

While a company like Primerica is in a position to offer more nuanced advice on your personal financial position, knowing the broad differences between mutual funds and ETFs is an important foundation of knowledge if you’re looking to choose between the two as your main investment strategy.

In this article, I’ll run you through the chief differences between ETFs and mutual funds. Then I’ll run you through how to make a sound decision about which is best for you from a Canadian context.

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ETFs, and How They Differ From Mutual Funds

Let’s start with the most important and obvious distinction. Mutual funds are not an agile investment instrument. That’s not to say they’re immutable and fixed, but an investor can’t shift mutual funds around as one would when they are buying stocks.

ETFs, on the other hand, can be traded just as you would trade stocks. Most of the other differences you’ll find between these two investment tools stem from this important difference in their trading timeframe.

For example, mutual funds are actively managed. Granted, that level of management shifts variably — from closely hands-on to somewhat hands-off. ETFs, however, are passively managed. You choose a set of variables and your ETF position reacts accordingly. Possible variables could include ETFs that track growth stocks, particular industries, or even Canadian dividend ETFs.

How does this impact their fees?

Given they’re more resource intensive to manage, it’s probably of little surprise that a mutual fund typically requires a higher minimum opening balance than an ETF.

Costs follow the same pattern. Because mutual funds are actively managed, you’ll be required to pay for their service. Adding to this, funds managers are typically highly qualified individuals. Access to these skills come at a cost, typically much higher than ETFs.

Finally, let’s look at their relative size. Mutual funds eclipse ETFs. In the US, US equity mutual funds comprise around $7 billion in investments, while ETFs make up just shy of $2 trillion. Part of this can be attributed to the fact that the relative stability of mutual funds makes them perfect for retirement plans, while ETFs are more suited for more transient investment strategies.

Which is Best?

Before comparing the strengths and weaknesses of ETFs and mutual funds, it’s good to point out that there’s really no clear winner here. Which way you lean is going to depend on your personal circumstances, and the best way to navigate that decision is to seek independent financial advice.

Regulations

Mutual funds and ETFs are regulated very differently.

Canada’s National Instruments for investment protection incorporate rules for the regulation of ETFs. These protections lay out a detailed set of requirements for the full disclosure of all relevant investment information. This includes information on pricing, ethical standards and any information which helps ensure fair and legitimate access to Canadian financial markets.

There’s also the Investment Industry Regulatory Organization of Canada (IIROC), an independent regulatory organization which maintains oversight of ETF investment practice within the financial sector.

Mutual funds are also heavily regulated, but there is less regulatory control and a lower focus on full transparency over individual financial decisions which go into managing a mutual fund portfolio. This is to be expected given that mutual funds are a less volatile and agile investment instrument.

Trading Flexibility Versus Trading Stability

ETFs are undoubtedly a solid choice if you’re seeking a high level of trading flexibility. Buying and selling ETF units can occur throughout the trading day and trade much like a stock. Mutual fund deals can only be struck once per trading day, typically with a price being posted at the end of the day.

On the other hand, mutual funds offer far greater stability. Because they are closely managed on the investor’s behalf, fewer financial decisions need to be made. This is a significant factor for new investors to consider, or those who don’t wish to maintain a constant awareness of their financial portfolios. Keep in mind, this comes with a cost.

Cost

The ingredients of making a solid cost decision between ETFs and mutual funds is somewhat complex, and again, you’re well served to seek independent financial counsel before making a decision.

Mutual funds, as already discussed, have ongoing operating and management costs. You’re purchasing the oversight services of an accomplished professional with years of financial acumen under their belt. This means that regardless of your earnings or losses with a mutual fund, you’re still liable to pay a management fee.

ETFs also attract ongoing operating costs, but generally these are significantly lower than mutual funds management costs. However, an ETF investor will hit additional costs which do not apply to mutual funds. These include broker commissions and other costs associated with participating in the market, such as inactivity fees with your brokerage if you don’t do much trading.

Diversification

Both mutual funds and ETF are built around the notion of risk mitigation through diversification. For both instruments, you can buy multiple securities in whatever relative quantities you favor. In this sense, both bring a good scope for building a well-protected financial portfolio.

ETFs, however, are a better choice if you seek a particularly high level of diversity across your portfolio, simply because you have more options for buying and selling on command if your investment is through an ETF.

So, which is right for you? When it comes to ETFs and mutual funds, what is right for you is going to depend greatly on your expectations regarding funds management, your investment timeline and your desired level of financial control. Generally speaking, if you’re looking for greater investment flexibility, you’ll likely lean towards an ETF. If, on the other hand, you’re looking for a closely managed fund and the confidence that it brings, a mutual fund may offer a better investment platform.

Investment decisions can seem overwhelming, but great resources are out there, including independent financial advisers who are well equipped to forensically analyze your position and offer experienced and authoritative advice.

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Dan Kent


An active dividend and growth investor, Dan has been involved with the website since its inception. Dan is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. Dan manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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