Mutual funds vs. ETFs: basic comparison

Mutual funds remain Canadians’ favourite investment. It is estimated a trillion dollars sits in mutual funds in the country.

Although Exchange-Traded Funds – ETFs- have been introduced in the late 80’s, they have only started becoming increasingly popular a few years ago.

Mutual funds and ETFs are a bit like cousins. They share a few common traits but are actually very different.

Mutual fund ETF
definition An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. An exchange traded fund is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.
Management style Usually active; Fund managers tries to outperform the market/index. Rebalancing portfolios is common Usually passive; an ETF merely tries to replicate the index it is tracking. Rebalancing is seldom necessary.
Management fees (MER/TER) Usually on the high side, as mutual funds are actively managed.The MER directly impacts the fund’s return. On the low side, due to the passive approach.
Other fees Mutual funds are notorious for carrying various fees such as trailer fees, switch fees, redemption fees, sales charges etc…. Trading fees paid to broker
Risk Both products have a similar risk level. You can lose or make money.
Unit value Calculated at the end of the day Varies throughout the day as ETFs are listed on stock-exchanges
Buying Most MFs require a minimum amount for buying. Some also require additional contributions. No minimum required but need to buy “in bulk” or “lump sum”. Some brokers charge additional fees for low volumes.
Selling Cash In-kind. Investors usually exchange their units.Cash is possible, but usually at a discount
Dollar cost averaging/monthly contributions Yes No, because of the trading fees
Tax efficiency Usually lower Usually higher

 

ETFs are cheaper and more transparent. Investors know exactly what they are getting. Their downside is that they are more for people with larger amounts of cash available. They also have a more long-term range, because of the “in-kind” consideration and the trading fees.

Most mutual funds are expensive and very few outperform their indexes. But, they are a good starting point for the beginner investor and for people who don’t necessarily have tons of cash.

Some funds are specifically targeted at D.I.Y investors with lower fees. Others also start having a more passive approach and actually generate decent results.

Just like any financial product, do your own research before investing. Don’t just look at the amount of fees you may be paying –or not- or the return. You need to understand what you are buying into.

2 thoughts on “Mutual funds vs. ETFs: basic comparison

  1. Barry @ Moneywehave says:

    I recently switched from TD e-Series to ETFs so I could save money on the MERs. I was actually quite happy with e-Series but my portfolio got to the size where it made sense to use ETFs

    Like

    • Stephanie says:

      I agree with you. Once you reach a higher financial level it makes more sense to switch to ETFs. They are cheaper, a lot of them perform very well and they are more efficient tax-wise.
      Unfortunately, I am not at that level yet. I have recently switched to D.I.Y. investing and got out of mutual funds that were not doing anything for me, i.e. high MER, low return. So far so good!

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s