Traditional index investing — through market-cap-weighted ETFs or mutual funds — can offer several significant benefits.
Index funds have a powerful advantage over most actively managed funds—lower costs. Here are two main reasons:
Lower management costs. It simply costs less to manage and operate an index fund. That's because index funds don't have to employ highly paid teams to analyze and select securities.
Lower transaction costs. Index funds use a buy-and-hold approach, which means that index fund managers generally trade securities less often than active fund managers. Less trading reduces brokerage commissions and other expenses associated with trading securities.
| Average MER | ETF | Mutual Fund |
| Allocation | 0.51 | 0.93 |
| Equity | 0.55 | 1.01 |
| Fixed Income | 0.43 | 0.71 |
| Money Market | 0.15 | 0.35 |
Source: Vanguard illustrations and calculations using data from Morningstar as of March 31, 2025. Figures are based on mutual funds registered for sale in Canada. See footnote 1 for additional disclosures.
Maintaining a diversified portfolio is an essential part of a successful investment plan. Indexing can be a simple way to achieve diversification.
| Average # of Holdings | ETF | Mutual Fund |
| Allocation | 12,934 | 5,023 |
| Equity | 403 | 339 |
| Fixed Income | 1,001 | 881 |
| Money Market | 52 | 65 |
Source: Vanguard illustrations and calculations using data from Morningstar as of March 31, 2025. Figures are based on mutual funds registered for sale in Canada.
Thanks to their diversification and low costs, index funds can be an effective way to achieve competitive returns over the long run.
Index funds have a precise, easily understood objective: to track the performance of a specific index (before fees and expenses). With index funds, you always know how your money is invested.
Index funds reduce exposure to manager risk, which is the risk that poor security selection will cause underperformance. That's because they seek to track, not outperform, a market index. Active fund performance, on the other hand, is subject to more uncertainty.
1 Source: Vanguard calculations based on MER data provided by Strategic Insight as of March 31, 2025. Calculations are based on the average asset-weighted MER for load and no load series A, series T and Advisor series mutual funds. MERs are expressed as an annual percentage of fund assets and are composed of base management fee plus certain operating expenses, such as administrative costs, plus applicable taxes. Transaction costs, bid-ask spreads, inflation, cost of advice and income taxes payable by any unitholder, are not included. There may be significant differences between the investments that are not discussed here, including different objectives and risk factors. Cost comparisons are hypothetical for illustrative purposes only and are not meant to be all-inclusive. MERs are subject to change.