ETFs and mutual funds provide exposure to particular markets or market segments. So it's not surprising that they share more similarities than differences.
By pooling money from many investors, ETFs and mutual funds have greater buying power, enabling them to buy many different securities in large quantities. This results in greater diversification than an investor can achieve buying individual stocks. ETFs, like mutual funds, can also provide diversified exposure to virtually any segment of the market, in Canada and internationally.
Compared with actively managed funds, index ETFs and index mutual funds are extremely transparent. Investors know what the holdings are and in what proportion based upon the target index, particularly when a full replication strategy is used to track the index.
Like mutual funds and other investments, ETFs in Canada are regulated by the securities commissions of each province or territory and are subject to the regulations set out in the various National Instruments, including National Instrument 81-102, and those within the broader provincial Securities Acts. In addition to governmental oversight, dealers who sell ETFs are regulated by the Canadian Investment Regulatory Organization (CIRO)
ETFs offer additional trading flexibility when compared with mutual funds. Orders to buy or sell ETF units are executed throughout the trading day at market-determined prices that change continually. ETFs can also be traded at the day's calculated net asset value (NAV). By contrast, mutual fund shares may only be purchased or redeemed at their NAV, which is struck once a day. Typically, this is the end-of-day price in the relevant market.
Both ETFs and mutual funds charge a management expense ratio (MER) which essentially covers ongoing operating costs. ETFs generally have lower MERs than mutual funds, but because ETFs trade on exchanges, they also have unique costs not associated with mutual funds, such as broker commissions or bid-ask spreads.
While ETFs offer more trading flexibility, mutual funds offer more flexibility when it comes to automatic investing services. Mutual funds typically provide automatic investing and withdrawal services that link directly to investors' bank accounts, services that ETFs typically do not provide.
| ETFs | Mutual funds | |
| Access | Shares bought and sold on an exchange or over the counter through a stockbroker, platform offering brokerage services, or a market maker. | Shares bought and sold directly through the fund company or through a fund distributor. |
| Pricing | Share prices set by the market throughout the trading day; net asset value based on official closing prices. | Net asset values determined once per trading day, based on official closing prices, after financial markets close. |
| Minimum trade size | One share | Fractions |
| Transaction costs | Brokerage commissions and bid-ask spreads on each direct purchase and sale. | Sales charge (for most funds), entry/exit charges or swing prices. |