INVESTMENT FUNDS

It’s one of the most common questions Canadian investors ask when building a portfolio. Both exchange traded funds (ETFs) and mutual funds are popular investment vehicles that help investors diversify and access professional management, but they operate quite differently. In Canada, understanding those differences isn’t just about choosing an investment product; it’s about knowing how costs, accessibility, and trading flexibility can impact your long-term returns.

This guide offers a clear, Canada-specific breakdown aligned with how regulators such as the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) define and oversee these investment funds. You’ll learn how mutual funds price once daily at their net asset value (NAV), while ETFs trade intraday on the exchange just like individual stocks. We’ll also explore how Canadian fee structures differ, such as management expense ratios (MERs), trailing commissions, and brokerage trading fees, and what those mean for your bottom line.

By the end, you’ll have a practical understanding of ETFs vs mutual funds, how each fits into your investment strategy, and why one might be better suited to your goals, budget, and comfort with managing your own investments through platforms like Questrade.

Quick Comparison: Exchange Traded Funds vs Mutual Funds in Canada

When comparing ETFs vs mutual funds, the bottom line is simple: ETFs trade intraday, while mutual funds price only once daily. Beyond this, differences in cost structures, automation features, and tax treatment can significantly affect your returns. Understanding these contrasts helps Canadian investors choose the right investment vehicle for their goals and habits.

Pricing

• ETFs: Trade throughout the day like stocks, with prices that fluctuate based on market supply and demand.
• Mutual Funds: Valued only once per day, after markets close, at the end-of-day Net Asset Value (NAV).

This distinction influences liquidity, trade timing, and how precisely investors can execute buy or sell decisions.

Cost Layers

• Management Expense Ratio (MER): Covers fund management and operating costs.
• Trading Commissions: Common for ETFs (typically $0-$10 per trade, depending on your broker).
• Bid-Ask Spreads: Implicit costs from small gaps between buying and selling prices.
• Short-Term Trading Fees: Mutual funds may charge up to 2% if you redeem within 90 days.

Together, these factors shape your true cost of ownership, not just the published MER.

Automation

• Mutual Funds: Excellent for Pre-Authorized Contributions (PACs), allowing automatic, scheduled investing.
• ETFs: Typically require manual trades, though some online brokers now offer recurring ETF purchases.

Automation makes mutual funds convenient for hands-off investors seeking consistent, disciplined investing habits.

Tax Tendencies

• Mutual Funds: Frequent buying and selling within the fund can trigger capital gains distributions, even if you don’t sell units.
• ETFs: Their in-kind creation and redemption process often minimizes these taxable events.

As a result, ETFs tend to offer greater tax efficiency, particularly for long-term, tax-conscious Canadian investors.

Best For Scenarios

Each investment fund type suits a different investor profile. Below is a general overview of who ETFs are best suited for and who mutual funds are ideally suited for:

• Hands-off investors often prefer mutual funds for their automation features
• DIY investors often prefer ETFs for their lower costs
• Tax-sensitive, long-term investors often prefer ETFs

Ultimately, the best choice depends on your comfort with trading, need for automation, and sensitivity to costs and taxes.

Fees and Ongoing Mutual Fund and ETF Costs

When comparing ETFs vs mutual funds, fees play a major role in shaping long-term returns. Some costs are visible on your statement; others quietly undermine growth over time. Understanding each layer, both the explicit and the hidden, helps Canadian investors make smarter, cost-efficient decisions when choosing between these investment funds.

Costs You’ll Pay Either Way

Management Expense Ratios (MERs) cover management, operations, and administrative expenses charged by the fund provider.

• Mutual Funds: MER average is around 2.0% annually, especially among actively managed mutual funds.
• ETFs: MER generally ranges between 0.20%-0.75%, particularly for index funds and passively managed ETFs.

A 1% difference in MER might not seem significant, but compounded over time, it can mean thousands in lost potential growth. In general, lower MERs translate to higher net returns for investors.

Costs Unique to ETFs

• Trading Commissions: Charged per trade, typically $0-$10 depending on your brokerage. Some Canadian platforms, such as Questrade, now offer commission-free ETF purchases, but it’s wise to confirm current pricing.
• Bid-Ask Spreads: The hidden cost between what buyers pay and sellers receive; wider spreads lead to slightly higher transaction costs, especially for less-liquid ETFs.
• Currency Conversion: If purchasing U.S.-listed ETFs in Canadian dollars, foreign exchange (FX) fees can reach 1-2%.

Tip: Use CAD-listed ETFs or employ Norbert’s Gambit to minimize conversion costs.

While ETFs generally carry lower fees, active traders can experience extra friction from spreads and commissions.

Costs Unique to Mutual Funds

• Short-Term Trading Fees: Many mutual funds charge up to 2% if you sell within 90 days of purchase. These fees discourage short-term speculation and help protect long-term investors from trading-related costs.

If you prefer flexibility to move your money quickly, exchange traded funds may offer greater liquidity and lower short-term penalties.

Key Canadian Regulatory Facts

• Deferred Sales Charges (DSC) Ban: As of June 1, 2022, DSC fee structures were banned across Canada for self-directed (order execution only) accounts.
• Trailer Fee Ban: The same Canadian Securities Administrators (CSA) reforms prohibited trailer commissions on new mutual fund sales.

Legacy DSC funds may still exist, but can no longer be newly issued or sold. These reforms increase transparency and better align fund company incentives with investor interests.

How ETFs and Mutual Funds Trade

The key difference between ETFs and mutual funds lies in how they trade. ETFs behave like stocks, while mutual funds do not, and that distinction affects liquidity, pricing, and investor flexibility.

Exchange traded funds are bought and sold intraday on Canadian stock exchanges, such as the Toronto Stock Exchange, at market prices that fluctuate throughout the day. This means you can place limit orders, set stop-loss triggers, or trade instantly whenever markets are open. Each trade occurs between buyers and sellers, not directly with the fund provider, and small pricing gaps known as bid-ask spreads can slightly affect what you pay or receive. In Canada, large, highly traded ETFs usually have very tight spreads, while niche or thinly traded ones may be less liquid.

Mutual funds, on the other hand, are not exchange-traded. They’re priced only once daily, after the market closes, at their Net Asset Value (NAV). This means all buy and sell orders are processed at the same end-of-day price, with no opportunity to react to intraday market movements. Investors purchase or redeem directly through the fund company or a financial intermediary, not on an exchange.

Another distinction: mutual funds allow partial units, enabling you to invest an exact dollar amount, while ETFs trade in whole units only, so your minimum purchase equals the market price per share. Mutual funds often require a minimum investment of $500-$1,000, whereas ETF entry depends solely on the share price and any commission costs.

Actively Managed vs Passive Investing in 2025

When comparing ETFs vs mutual funds, it’s tempting to assume that mutual funds are active and ETFs are passive, but in 2025, that distinction no longer holds true. Both investment vehicles can follow active or passive management strategies, giving Canadian investors more choice than ever before.

Active management means a portfolio manager or fund manager actively selects securities, aiming to outperform a benchmark index through research, analysis, and timing. These are often called actively managed funds, and they tend to have higher management expense ratios because of the human expertise involved. Examples include many actively managed mutual funds and a growing number of actively managed ETFs in Canada.

Passive management, on the other hand, seeks to replicate the performance of a market benchmark, like the S&P/Toronto Stock Exchange Composite Index, rather than beat it. These index funds and index mutual funds simply track an index’s holdings, resulting in lower trading costs, fewer taxable events, and lower MERs.

The myth that ETFs are always passive and mutual funds are always active has faded. As of 2025, the Canadian ETF industry includes plenty of active ETFs across equities, fixed income, and multi-asset strategies. Many traditional fund companies, such as those affiliated with Canada’s major financial institutions, now offer ETF versions of their flagship mutual funds.

For instance, several Canadian financial institutions have launched “ETF series” of existing mutual funds, meaning investors can access the same investment strategy in a different structure. The underlying portfolio and fund managers remain identical; the difference lies in how the product trades and is priced.

In short, the 2025 landscape has blurred the lines between ETFs and mutual funds. Today, Canadian investors can choose either structure for both active management and passive, index-based investing, selecting the option that best fits their trading preferences, costs, and tax goals.

Taxes for Canadians

When comparing ETFs vs mutual funds, taxes are one of the most overlooked yet important considerations. The bottom line: tax outcomes depend on your account type and the fund’s turnover rate. Understanding how each investment vehicle distributes income, and how those distributions are taxed, can help you keep more of your returns over time.

Distributions in Taxable Accounts

Both exchange traded funds and mutual funds can distribute several types of income throughout the year. These include:

• Interest income: Taxed at your marginal tax rate as ordinary income, with no special deductions or credits. This typically comes from bond funds or money market holdings.
• Eligible dividends: Issued by Canadian corporations and benefit from the dividend tax credit, reducing your effective tax rate.
• Capital gains: When the fund sells securities for a profit, 50% of the gain is taxable, while the other half is tax-free.

All these forms of income are reported on T3 slips in non-registered accounts. Even if you reinvest distributions, you must still declare them for that tax year.

Turnover Effects

The portfolio turnover ratio (e.g., how frequently a fund buys and sells securities) has a major impact on tax efficiency. Actively managed mutual funds often have higher turnover, triggering realized capital gains that are distributed to investors. You might owe tax even if you haven’t sold your mutual fund units.

ETFs, by contrast, are generally more tax-efficient. Thanks to their in-kind creation and redemption mechanism, fund providers can swap securities with institutional market makers instead of selling them, avoiding most taxable events. This structure means ETFs often defer or minimize capital gains distributions, especially in passively managed index ETFs.

Holding Active ETFs and Mutual Funds Inside Registered Plans

Your account type plays an equally critical role in taxation:

• Tax-Free Savings Account (TFSA): All growth and withdrawals are completely tax-free.
• Registered Retirement Savings Plan (RRSP): Investments grow tax-deferred, and withdrawals are taxed as ordinary income in retirement.
• Registered Retirement Income Fund (RRIF): Similar to an RRSP, but withdrawals are mandatory and taxable.
• Registered Education Savings Plan (RESP)/Registered Disability Savings Plan (RDSP): Growth is tax-deferred, with specific rules for taxation on withdrawals depending on who receives the funds.

Holding mutual funds or ETFs inside registered plans helps shelter gains and income from immediate taxation.

ETF vs. Mutual Fund Tax Comparison

Please note that this section is for educational purposes only and does not constitute personalized tax or investment advice. Tax outcomes vary by individual situation; consult a qualified tax professional before making investment decisions.

Behavioural & Practical Considerations: Comparing Index Mutual Funds & Exchange Traded Funds

When deciding between ETFs and mutual funds, the best choice often comes down to behavioural fit rather than structural advantages. The most successful investment vehicle is the one you can stick with over time through market ups and downs.

Dollar-Cost Averaging

Mutual funds make dollar-cost averaging (DCA) simple. Through Pre-Authorized Contribution (PAC) plans, you can automatically invest a set amount on a regular schedule, e.g., weekly, biweekly, or monthly. This “set and forget” approach helps remove emotion from investing and encourages consistency.

ETFs, on the other hand, usually require manual purchases or the use of recurring buy features available on some modern trading platforms. While DCA is still possible, it demands more discipline and attention, since you decide when and how to place each trade.

Trading Windows

ETFs trade throughout the day, allowing investors to react instantly to market movements or adjust positions with limit and stop orders. Mutual funds only price and trade once daily, after markets close, at that day’s Net Asset Value (NAV). For investors who prefer simplicity and aren’t concerned with intraday fluctuations, this once-a-day execution can actually reduce the temptation to time the market.

Simplicity vs Flexibility

Mutual funds offer simplicity, which may be ideal for long-term, hands-off investors. ETFs provide greater flexibility and control, appealing to DIY investors comfortable with managing trades and monitoring prices. However, with flexibility comes responsibility: staying disciplined and avoiding overtrading is key.

Tracking Error vs Tracking Difference

When comparing index funds, you’ll often hear about tracking error and tracking difference.

• Tracking error: Measures short-term performance deviations from the benchmark.
• Tracking difference: Reflects the total long-term gap caused by fees and costs.

Lower tracking difference indicates more efficient index replication, something both index mutual funds and index ETFs strive for.

Ultimately, behavioural comfort (how well the fund’s structure fits your investing habits) matters as much as performance.

Use Cases & Personas According to Your Investment Goals

When comparing ETFs vs mutual funds, there’s no single “best” choice, only the one that fits your investing style, goals, and behaviour. The bottom line: match your style to the right product. Whether you prefer hands-off automation or full control, there’s an option that aligns with how you like to invest.

1. The Hands-Off Saver

Profile: You value simplicity, automation, and peace of mind over constant market monitoring.

Common Alignment: Investors with this profile often invest in a balanced mutual fund or an asset-allocation ETF that automatically maintains your target mix of stocks and bonds.

Why: These funds are diversified, professionally managed, and rebalanced automatically. You don’t need to trade or time the market.

Platform tip: Set up Pre-Authorized Contributions (PACs) to invest regularly and harness the benefits of dollar-cost averaging.

This approach suits those who want steady progress without daily decisions.

2. The Fee-Sensitive DIY Investor

Profile: You prefer control and aim to minimize costs.

Common Alignment: Investors with this profile often invest in a low-cost, broad-market ETF portfolio, such as one tracking the S&P/TSX Composite Index or a global equity benchmark.

Why: ETFs typically feature lower management expense ratios and better tax efficiency, especially in non-registered accounts.

Platform tip: Consider using an online brokerage that supports commission-free ETF trades or recurring buys.

This persona is comfortable executing trades, comparing spreads, and managing portfolio rebalancing independently.

3. The Advice-Seeker

Profile: You value guidance from a financial expert and prefer professional input when planning for retirement, education, or other goals.

Common Alignment: Investors with this profile often buy/invest in an advised mutual fund or a managed ETF portfolio offered through a licensed advisor or robo advisor platform.

Why: You gain personalized advice, regular reviews, and help navigating market volatility, all while delegating day-to-day investment management.

Platform tip: Confirm how your advisor is compensated and ensure fees are transparent under CSA rules.

Mini-Checklist: Find Your Fit

Switching From Mutual Funds to ETFs

Moving from mutual funds to ETFs can lower your ongoing costs, but it requires careful planning to avoid unnecessary taxes or penalties. The bottom line: fee savings are real, but smart execution protects your returns.

Before switching, compare management expense ratios and verify whether your mutual fund includes trailer commissions (banned on new sales but still present in some legacy holdings). Check for short-term trading fees (often up to 2% if sold within 30-90 days) and be mindful of deferred sales charge schedules if you hold older funds. In non-registered accounts, selling mutual funds may trigger capital gains, so assess the tax impact before proceeding.

9-Step Checklist

1. Take inventory of your holdings: List each fund, account type, and cost base.
2. Check redemption schedules: Confirm no DSC or early-sell fees apply.
3. Estimate capital gains: Review T3/T5 slips or use cost base tools.
4. Pick equivalent ETFs: Match similar exposure (e.g., Canadian equity or balanced).
5. Plan order timing: Avoid trading during volatile periods.
6. Minimize spreads: Use limit orders on liquid ETFs.
7. Confirm DRIP or recurring buy availability: Maintain automatic investing if desired.
8. Transfer funds: Coordinate with your broker for in-kind or cash transfers.
9. Rebalance post-trade: Align with your target asset allocation.

Canadian Short-Term Trading Fee Snapshot

Many Canadian mutual fund companies impose short-term trading fees to discourage speculation. These can range from 1% to 2% if units are sold within 30 to 90 days of purchase. ETF investors generally avoid such charges but should still watch for bid-ask spreads and small trading commissions when moving large sums.

Careful planning ensures your switch from mutual funds to ETFs is smooth, tax-aware, and cost-efficient, so you keep more of your money working for you.

Start Investing in ETFs, Mutual Funds & Individual Stocks Today

Choosing between ETFs and mutual funds ultimately comes down to your investing style, cost sensitivity, and behavioural preferences. ETFs offer lower fees, intraday trading, and tax efficiency, while mutual funds provide automation, simplicity, and professional management.

Understanding fees, taxes, trading mechanics, and your own comfort with investing will guide you to the right mix. Many Canadian investors use a combination of both to balance flexibility and convenience. By aligning your portfolio with your goals, risk tolerance, and account type, you can make informed choices that help your money grow efficiently over the long term.

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