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ETFs vs. Mutual Funds: What's the difference?
Are Exchange-Traded Funds (ETF) and Mutual Funds the same thing? Not exactly. Here are some key things any beginner investor should know about these popular investments.
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When you're just starting out as an investor, there are so many acronyms, account types and investments to learn, it can feel like a game of carnival whack-a-mole: You learn one new thing only to have two more questions arise. One topic that pops up often for new and novice investors? The difference between ETFs (Exchange-Traded Funds) and Mutual Funds.
Fortunately, the differences between these two popular types of investment products can be explained. And frankly, both types of products can help you reach your investment goals. Surely a comfortable retirement, a down payment for a home or a slick new reno is a more useful prize than a supersized stuffy. So let's put the mallet aside and take a moment to consider some of the key similarities — and differences — between ETFs and Mutual Funds, along with some of the reasons investors might choose them.
What are ETFs and Mutual Funds?
They are two kinds of investment products that share several similarities. Both ETFs and Mutual Funds offer a way for investors to pool money into a fund that make investments in a collection of stocks, bonds, or other assets. In exchange, investors receive a share of that investment pool, in the form of unit(s) of the fund or ETF. Both types of products are immensely popular with investors. According to the Investment Funds Institute of Canada (IFIC), which releases an annual report of Mutual Fund and ETF sales each year, Canadians had a total of $2.42 trillion invested in Mutual Funds at the end of 2024, and $518 billion invested in ETFs. Over the last two years, mutual fund assets have increased by $433 billion, recovering from a decline during 2022. ETFs also continued a two-year trend of growth. Over the last 10 years, ETF assets have increased by close to seven times.
Let's review some other ways in which ETFs and Mutual Funds are similar.
Similarities between Mutual Fund and ETFs in Canada
- They can both be held inside a Tax-Free Savings Account (TFSA), or Registered Retirement Savings Account (RRSP) and non-registered accounts. By making regular contributions to your investments in these accounts, you can take advantage of compounding interest to grow your wealth.
- They both can add instant diversification to a portfolio. The funds often hold a spectrum of investments, as opposed to a single stock or security, which lowers the risk that a single investment can tank your whole investment strategy.
- They both offer variations to match your risk profile. The companies that assemble and manage ETFs and Mutual Funds can tailor the funds to hold a heavier mix of equities and higher risk securities for more aggressive investors, or a greater mix of lower risk investments such as bonds and cash for more conservative investors.
Ultimately ETFs and Mutual Funds can make money for investors in two very similar ways. The first is from capital gains, which is the increase in asset value of the investments themselves. The other is from distributions. Depending on the fund you choose, you may get annual distributions of dividends, interest, or other income from the investments. We won't talk about that here. For now, let's look at some of the major ways ETFs and Mutual Funds differ.
How ETFs differ from Mutual Funds in Canada
ETFs and Mutual Funds get bought and sold at different times
One of the ways ETFs and Mutual Funds differ is how they are priced and sold. ETFs trade in real-time on an exchange (like the Toronto Stock Exchange) and can be purchased at any time throughout the trading day through any brokerage account. In contrast, Mutual Funds orders are aggregated throughout the day by the fund provider and executed only once, at the end of the day, based on market close prices.
ETFs and Mutual Funds have different costs to consider
Another way ETFs and Mutual Funds differ are in their management fees and operating expenses. You don't pay these fees directly; they get paid by the fund itself and are expressed as a percentage of the total value of the fund (it can be a range of less than 1% to more than 3%). The management expense ratio (MER), is often lower for an ETF because many ETFs are not "actively managed," meaning that their underlying investments are not selected based on a manager's outlook or assessment of these securities, but instead are selected so as to best track a benchmark, such as the S&P 500 or the S&P/TSX index.
The MER for a Mutual Fund may also include something called a trailing commission, paid each year to your advisor's firm to cover the cost of the services you receive from an advisor.
As of June 1, 2022, the Canadian Securities Administrators have ruled that trailing commissions may no longer be included in the sale of mutual funds and ETFs held in self-directed accounts. Mutual Funds and ETFs that contain so-called trailer fees are no longer available to self-directed investors (DIY investors) using a brokerage account.
Mutual Funds trade at their Net Asset Value (NAV), while ETFs trade at the prevailing market price at the time of execution. This price may be slightly higher or lower than the underlying NAV and should be factored into the total cost of ownership of an ETF. Other ETF costs include trading commissions, trading spreads and the cost of owning a brokerage account.
ETF vs Mutual Fund explained with an example
Imagine you want to invest in a basket of fruits, where each fruit represents a different stock or bond. Buying an ETF is like shopping at a market where you can buy a basket of fruits any time during market hours. The price of the basket constantly changes based on the fruits in the basket, and you see these changes in real-time, allowing you to decide when to buy or sell.
On the other hand, investing in a mutual fund is like ordering a fruit basket online. You place your order, and at the end of the day, you receive your basket with fruits selected by an expert, similar to ETFs. However, you pay based on the total value of the basket at that specific time.
While both ETFs and mutual funds offer diversification and expert management, they cater to different preferences and investment strategies. ETFs provide transparency in pricing and allow for real-time trading (during trading hours), whereas mutual funds offer end-of-day pricing. Understanding these differences can help investors make informed choices that align with their financial goals.
Key Differences: ETFs vs Mutual Funds
ETFs |
Mutual Funds |
|
Trading and Pricing |
Trade on stock exchanges like individual stocks at the prevailing market price at the time of execution. Their prices fluctuate throughout the trading day based on supply and demand. |
Orders can be placed throughout the day, but they are filled only at the end of the trading day at the fund’s net asset value (NAV) price. |
Management Style |
Typically, passively managed, tracking an index such as the S&P/TSX Composite Index. However, there are also actively managed ETFs. |
Often actively managed, which means fund managers make decisions about how to allocate assets in the fund. There are also passively managed mutual funds that track indexes. |
Costs and Fees |
Generally, they have lower management expense ratio (MER) compared to mutual funds due to their passive management. May also be subject to trading fees like stocks. |
Can have higher fees due to active management, including costs for research and administration. Some mutual funds may have no load, front-end load or back-end load fee. |
Flexibility |
Offer more flexibility as they can be traded throughout the day and are considered more liquid. |
Transactions are processed once per day after the market closes. |

Advantages of investing in ETFs
There are several reasons investors can choose to invest in ETFs to help reach their investing goals. Because ETFs are purchased and sold throughout the day on an exchange, they offer a great amount of flexibility for investors, and are uniquely suitable for those who enjoy the responsibility of managing their own investments. Here are some more reasons some investors choose ETFs:
- ETFs can be a good way to add diversification to a portfolio
- The prices for ETFs change minute- by minute, making them suitable for day traders as well as long-term investor
- ETFs tend to have lower fees and no minimum investment, making them a low-cost alternative for many portfolios. However, investors should be mindful of trading commissions and trading costs (bid-ask spreads) that may result from the frequent trading of ETFs, and could potentially eat away at returns.
- ETFs tend to be more transparent in their disclosure of holdings. Many ETF issuers provide the full list of underlying holdings on their website.
Investing in ETFs also has several disadvantages, including:
- Like all investments, ETFs are subject to market fluctuations, which can affect their value.
- Some ETFs may track narrow sectors or specific markets, which might not provide broad diversification.
- Frequent buying and selling of ETFs can incur trading fees and commission costs, potentially reducing overall returns.
- Some ETFs, especially those tracking niche markets, may have lower trading volumes, leading to wider bid-ask spreads and liquidity concerns.
- ETFs aim to replicate the performance of their underlying index, but discrepancies can occur due to management fees or other factors, leading to tracking errors.
These factors should be considered alongside the benefits when deciding whether to invest in ETFs.
Advantages of investing in Mutual Funds
There are also several reasons investors may choose to invest in Mutual Funds to help reach their investing goals. One key reason is that they can be simple to manage in a hands-off way, particularly if you're working with an advisor. Here are some more reasons investors choose Mutual Funds:
- Mutual Funds are often designed for long-term investors and their fee structure (which may include an Early Redemption Fee) further encourages investors to stay invested, even during challenging market conditions.
- Mutual Funds may be well-suited to people who prefer their portfolio to be professionally managed
- Mutual Funds can be easily incorporated into a set-it-and-forget-it automatic contribution program
Investing in Mutual Funds has several disadvantages, including:
- Mutual funds often charge management fees, sales loads, and other expenses that can reduce overall returns.
- Investors have no control over the specific investments made within a mutual fund, as these decisions are handled by the fund manager.
- Mutual funds can generate capital gains and income distributions that may result in tax liabilities for investors.
- Actively managed mutual funds may not always outperform their benchmark indices, leading to lower-than-expected returns.
- While mutual funds are generally liquid, they are typically priced once a day, which means investors cannot react immediately to market changes.
It's important to take these factors into account alongside the potential benefits, when considering mutual funds.
In the end, whether you choose to invest in ETFs or Mutual Funds — or both — is up to you and your investing style. Both ETFs and Mutual Funds can be an effective part of any portfolio, whether you are trading daily or executing a long-term buy-and-hold strategy.
FAQS
What is the difference between Mutual Funds versus Index Funds?
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities, managed by professional fund managers. Index funds are a type of mutual fund that aim to replicate the performance of a specific index, such as the S&P 500, by holding the same stocks in the same proportions as the index. While mutual funds can be actively or passively managed, index funds are typically passively managed. You can also learn about differences between ETFs and index funds here.
What is the difference - Mutual funds vs Stocks vs ETFs?
Mutual funds are pooled investment funds managed by professionals, that can offer diversification across various asset classes. Stocks represent ownership in a specific company and involve direct investment in individual businesses. ETFs (Exchange-Traded Funds) are similar to mutual funds in that they can hold a diversified portfolio of assets, but they trade on stock exchanges like individual stocks, offering more flexibility in trading.
Compare and contrast Bonds vs Mutual Funds vs ETFs
Bonds, mutual funds, and ETFs are distinct investment vehicles, each with its own characteristics and advantages.
Bonds are fixed-income securities representing loans made by investors to borrower, typically governments or corporations, with periodic interest payments and return of principal at maturity. The maturity date is a predetermined future date when the bond's term ends, and the issuer is obligated to return the principal amount to the investor / bondholder. This repayment marks the completion of the bond's life cycle. Bonds can have varying maturity lengths, ranging from short-term (less than one year) to long-term (up to 30 years or more).
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities, managed by a professional. Returns from mutual funds come from dividends, interest, and capital gains from the fund's portfolio. Mutual fund shares are bought and sold at the end of the trading day at the net asset value (NAV).
ETFs are similar to mutual funds in that they hold a diversified portfolio of assets, but they trade on stock exchanges like individual stocks. Returns from ETFs are based on the performance of the underlying assets, and they offer the advantage of being traded throughout the day at market prices, which fluctuate like stocks.
Key differences among these investment options include management styles, liquidity, and pricing. While both mutual funds and ETFs can be actively or passively managed, bonds are not managed in the same sense. ETFs can provide more liquidity and flexibility in trading compared to mutual funds because of real-time pricing during market hours. Each investment type serves different purposes and can be selected based on an investor's financial goals, risk tolerance, and investment strategy.
Is it better to invest in ETFs or mutual funds?
The choice between ETFs and mutual funds depends on individual investment goals, preferences, and circumstances. ETFs offer trading flexibility, and generally lower expense ratios due to their structure. Mutual funds may provide advantages such as access to a wider range of investment strategies. Evaluating factors like cost, management style, and investment strategy can help determine which option aligns better with an investor's needs.
Which one provides better return - Mutual Funds or ETFs?
The returns from mutual funds and ETFs can vary based on the specific investments and market conditions. Generally, neither is inherently superior in terms of returns; performance depends on the assets held within the fund and the management strategies employed. It's crucial for investors to consider fund objectives, risks, fees, and their own financial goals when choosing between mutual funds and ETFs.
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