ETFs vs Mutual Funds

This post is not an opinion piece; it is an evidence-based analysis of a system that extracts billions of dollars from investors' pockets each year. Empirical data will be used to demonstrate three facts: 1) Canadian mutual fund fees are among the highest in the developed world. 2) These fees create a mathematical "fee drag" that makes long-term wealth creation statistically improbable. 3) The sales pitch used to justify these fees—access to "expert" active management—is a marketing myth, proven false by objective data. The conclusion is inescapable: the single best move for most investors is to transition to low-cost, passively managed Exchange-Traded Funds (ETFs). For those serious about this transition, resources like Investing for Canadians are an indispensable part of the modern investor's toolkit.

Canada: A Global Outlier on High Fees

The high cost of investing in Canada is not a minor issue; it is a structural anomaly. Research studies, media reports, and regulatory analyses consistently conclude that Canadian mutual fund fees are among the highest in the world.[1, 2, 3] A 2024 Morningstar global study, for example, placed Canada near the bottom of 26 markets studied for fund fees.[4]

This disparity is especially stark in common, diversified products. For asset-allocation funds, the asset-weighted Management Expense Ratio (MER) in Canada is approximately 1.8%. This figure is three times higher than the equivalent fee in the United States, which sits at 0.6%.[4]

The industry's primary defense for this gap is that Canadian MERs are "bundled," meaning they include the cost of financial advice, whereas in the U.S. and other markets, this fee is often "unbundled" and paid separately.[4, 5] This argument is fundamentally flawed for two critical reasons. First, bundling advice costs into the product's MER creates a severe, documented conflict of interest, incentivizing the sale of funds that pay the advisor more, not funds that are best for the client.[6, 7] Second, even when comparing unbundled "fee-based" F-series funds, the total cost of ownership remains exceptionally high compared to a low-cost, self-directed ETF approach.

The MER Gap: Quantifying the Damage

The core of the issue lies in the Management Expense Ratio (MER). The MER represents the total cost of managing and operating a fund, including management fees, operating expenses, and taxes. It is expressed as an annualized percentage of the fund's assets and is deducted directly from a fund's returns, creating a direct and compounding drag on performance.[8, 9]

While the industry correctly notes that fees have declined [10, 11], the average asset-weighted MER for Canadian mutual funds (long-term funds) was still 1.47% as of 2023.[12, 13, 14] This is merely an average; many of the most popular funds sold by major banks are significantly higher. For example, the TD Canadian Equity Fund - I (TDB161) carries an MER of 2.17%.[15] It is common for Canadian investors to be paying fees in excess of 2%.[16, 17, 18] In 2023 alone, these MERs generated nearly $31 billion in revenue for the Canadian fund industry.[12, 14]

In stark contrast, the average asset-weighted MER for long-term Canadian-listed ETFs was 0.32% in 2023.[12] However, this 0.32% average is itself pulled higher by a growing number of niche and actively managed ETFs. For the broad, passive, index-tracking ETFs that form the core of a sensible "Couch Potato" portfolio, MERs are routinely between 0.05% and 0.25%.[19, 20, 21]

Therefore, the real-world choice for an investor is not between 1.47% and 0.32%. It is, more accurately, the choice between a 2.17% bank mutual fund and a 0.20% all-in-one ETF. This is a differential of over 1.97%.

Investment Vehicle	Average Asset-Weighted MER (2023)	Source(s)
Canadian Mutual Funds (Long-Term)	1.47%	[12, 13, 14]
Canadian-Listed ETFs (Long-Term)	0.32%	[12]
Passive "All-in-One" ETFs	~0.20% - 0.24%	[20, 22]

The Compounding Crisis: Why "2%" is Not Small

A 2% fee does not mean 2% less in returns; the effect is far more corrosive. As Morningstar notes, high fees consistently detract from the ending wealth an investor accumulates.[23] This is because the fee is not a one-time cost; it is a permanent and compounding drag on capital. Year after year, the fee is levied not just on the initial principal, but on the accumulated gains as well.

A more powerful way to frame this cost is to view the fee as a percentage of the investor's gains.[24] If a portfolio has a gross return of 6% in a given year, a 2% MER consumes one-third (33.3%) of that total return. By comparison, a 0.2% MER consumes only 3.3% of the gain. The high-fee fund manager must outperform the ETF by 1.8% *just to deliver the same net return* to the investor—a hurdle that is rarely cleared.

The long-term impact is staggering. One study found that over a 20-year period, reducing fees by just 1% could add more than 30% to the final value of an investment portfolio.[25] The model below will illustrate the effect of a nearly 2% difference.

The $219,000 Payout: A 30-Year Wealth-Destruction Model

To make this tangible, a simple calculation can be performed, modeled on the tools provided by Canadian securities regulators and investor education sites.[26, 27, 28]

Consider the following scenario (calculations performed based on standard compound interest formulas, similar to those used by calculators [3, 27]):

• Investor: A Canadian with an initial portfolio of $100,000.
• Time Horizon: 30 years.
• Gross Annual Return: A hypothetical 6.0% average annual return before fees.
• Contributions: $0 in additional contributions (to isolate the effect of fees on the capital).

Case 1: The "Typical" Bank Mutual Fund

• Gross Return: 6.0%
• MER: 2.0% (A conservative figure for many common A-series funds)
• Net Annual Return: 4.0%
• Final Value after 30 Years: $324,340

Case 2: The Low-Cost ETF Portfolio

• Gross Return: 6.0%
• MER: 0.2% (The cost of a typical all-in-one ETF [22])
• Net Annual Return: 5.8%
• Final Value after 30 Years: $543,447

The verdict of this simple calculation is devastating. The "small" 1.8% fee difference, when compounded over 30 years, results in a final portfolio value that is $219,107 lower. The high-fee fund has consumed over 40% of the investor's potential future wealth. This is not an investment service; it is a massive wealth transfer from the investor to the fund company and the advisor. This example is not an exaggeration; other models, such as one showing a $700,000 difference on a $1 million portfolio, confirm the same mathematical certainty.[29]

Metric	Case 1: High-Fee Mutual Fund	Case 2: Low-Fee ETF
Starting Principal	$100,000	$100,000
Assumed Gross Return	6.0%	6.0%
Annual Fee (MER)	2.00%	0.20%
Net Annual Return	4.00%	5.80%
Final Value (Year 30)	$324,340	$543,447
Wealth Lost to Fees	$219,107	$0 (Baseline)

Beyond the MER: The Hidden "TER" (Trading Expense Ratio)

The Management Expense Ratio is not the only cost deducted from a fund's performance. A second, often-ignored cost is the Trading Expense Ratio (TER). The TER measures the brokerage commissions and other costs paid by the fund manager when they buy and sell securities *within* the fund.[30, 31]

Crucially, the TER is NOT included in the MER.[12, 30] The two costs are separate, and both create a drag on returns. By its very nature, an "actively managed" mutual fund trades frequently, which results in a higher TER.[31] A passive index ETF, which aims to simply replicate an index, trades very little (low turnover) and thus has a negligible TER.

This hidden cost further widens the gap between active funds and passive ETFs. In 2023, TERs accounted for 3% of revenues for mutual funds.[12] If a fund has a 1.95% MER and a 0.25% TER, the total performance drag on the investor is actually 2.20%.[31]

The Conflict of Interest: Embedded Commissions (Trailer Fees)

A large portion of the MER in typical "A-series" mutual funds (the ones most commonly sold by advisors) is not for investment management; it is a sales commission known as a "trailer fee" or "trailing commission".[32, 33, 34]

A trailer fee is an ongoing annual payment, typically ranging from 0.25% to 1.0%, paid from the fund's assets (as part of the MER) to the salesperson (the advisor) and their dealer.[9, 33, 35] This fee is paid every single year *for as long as the investor owns the fund*.[32]

This system, as identified by Canadian securities regulators, creates a massive and inherent conflict of interest.[6, 7] It creates an incentive for dealers to recommend funds that pay them the highest trailer commission, rather than the funds that are in the client's best interest.[6]

The Ontario Securities Commission (OSC) Investor Advisory Panel pointed to research that serves as a "smoking gun" for this harmful conflict. The research found that "mutual funds with trailer fees perform worse than other funds and, at the same time, attract higher inflows of cash from investors even when they perform badly".[36] This is empirical evidence of conflicted salesmanship triumphing over investor returns.

The Great Misconception: The 2022 Trailer Fee "Ban"

Many investors believe this conflict was resolved. The Canadian Securities Administrators (CSA) did, in fact, "ban" trailer fees, with the new rules taking effect on June 1, 2022.[37, 38, 39] However, this is a critical and widely misunderstood regulatory nuance.

The ban **ONLY** applies to "dealers that do not make a suitability determination".[37, 38, 39] In plain English, this ban only affects Order-Execution Only (OEO) dealers—that is, discount brokerages like Questrade, Wealthsimple, and TD Direct Investing, where investors manage their own accounts.[37, 38]

For these DIY investors, the ban was largely an administrative cleanup, as firms like Questrade were already rebating the trailer fees to clients.[40] For the 80% or more of Canadian investors who use an advisor at a bank or traditional dealership [5], this ban did nothing. The advisor is still, in 2024 and beyond, legally permitted to sell high-MER A-series funds and collect an embedded trailer fee every year.[41] The primary conflict of interest in the Canadian investment industry remains fully intact.

The Sales Pitch: The "Promise" of Active Management

How are 2%+ annual fees justified? The entire sales pitch rests on the promise of "active management".[42] The claim is that the investor is paying for a brilliant manager and a team of analysts who will generate "alpha" by picking the best stocks and timing the market. This expertise, the pitch claims, will allow the fund to *beat* the passive index.[43, 44]

As established in the fee drag calculation, this claim is mathematically flawed from the start. For a fund with a 2% total fee drag, the manager must be 2% smarter than the entire market, every single year, *just to tie* the index.[24] To *beat* the index, they must be even better. This is a herculean task.

The Verdict is In: The SPIVA Canada Scorecard

Investors do not need to guess whether active managers succeed in this task. The S&P Dow Jones Indices Versus Active (SPIVA) scorecards measure this exact promise.[43, 45] The SPIVA reports are the industry's objective, non-biased report card, and they are essential for investors because they correct for "survivorship bias"—the misleading practice where funds that perform poorly are simply closed or merged, making the industry's average performance appear better than it is.[43]

The results from the mid-year 2025 SPIVA Canada report are not just bad; they are statistically catastrophic for the active-management industry.[46, 47]

• Canadian Equity: Over the 10 years ending mid-2025, 97.65% of actively managed Canadian Equity funds failed to outperform their benchmark, the S&P/TSX Composite Index.[47]
• Canadian Focused Equity: Over 10 years, 99.07% underperformed their blended benchmark.[47]
• International Equity: Over 10 years, 93.06% underperformed the S&P EPAC LargeMidCap index.[48]
• Global Equity: Over 10 years, 97.65% underperformed the S&P World Index.[48]

The data is unequivocal. An investor who pays a 2% MER for an active Canadian equity fund has a 97.65% chance of underperforming a simple, 0.05% MER index ETF. They are paying a 40x premium for a 97.65% probability of failure. The "Performance Lie" is the most expensive, data-disproven narrative in Canadian finance.

Benefit 1: Tax Efficiency (A Critical Nuance for Non-Registered Accounts)

First, it is essential to debunk a common myth. In Canada, unlike in the United States, there is no fundamental structural tax advantage for ETFs. Both mutual funds and ETFs are typically structured as "mutual fund trusts" (MFTs) and receive the same capital gains tax treatment at the fund level.[52, 53]

The *real* tax advantage is practical and comes from two sources. First, passive index ETFs have extremely low portfolio turnover (they do not trade often), which naturally generates fewer taxable events (capital gains) *within* the fund.[52, 53, 54] Actively managed mutual funds, by contrast, trade constantly, generating a steady stream of capital gains.

Second, and more importantly, is the "in-kind redemption" mechanism.

1. Mutual Funds: When an investor (or many investors) sells their mutual fund units, they sell them back to the fund company.[55] The fund manager is then forced to *sell securities* from the portfolio to raise cash to pay the redeeming investor.[52, 55] If they sell stocks that have appreciated, this triggers a capital gain *inside the fund*. At the end of the year, this gain is distributed to *all remaining unitholders*.[56, 57] These investors receive a T3 tax slip [58] and must pay tax on these "phantom gains"—*even if they never sold a single unit*.[29] They have no control.
2. ETFs: When an investor sells an ETF, they sell it to *another investor* on the stock exchange (the "secondary market").[52, 55, 59] The fund manager is not involved. No stocks are sold within the fund, and no capital gain is triggered for the other investors.[54, 60] This process shields the remaining investors from tax liabilities created by other people's trades.[55]

In a non-registered (taxable) account, this means an ETF provides *tax control*. The investor generally only pays capital gains tax when *they* choose to sell *their* shares.[56, 61]

Benefit 2: Full Transparency

With an ETF, an investor knows exactly what they own, every single day. ETF providers are required to disclose their full holdings daily.[62, 63, 50]

Mutual funds, by contrast, are opaque. They are typically only required to disclose their holdings quarterly.[62] The holdings list an investor sees in a mutual fund report may be months out of date, representing a portfolio that no longer exists.[62]

Benefit 3: Intraday Liquidity and Trading

ETFs trade on a stock exchange, just like a stock.[59] This provides two significant benefits:

1. Intraday Trading: An ETF can be bought or sold at any time during the trading day at a live, market-determined price.[49, 64, 62, 65]
2. Price Control: This liquidity allows an investor to use more advanced order types, such as limit orders (to set a maximum buy price) and stop orders (to trigger a sale at a certain price).[66, 67]

Mutual funds, on the other hand, are priced only once per day, after the market closes, at their end-of-day Net Asset Value (NAV).[64, 62, 59] All orders placed during the day, whether at 9:31 AM or 3:59 PM, are executed at that single, unknown future price. This gives the investor zero control over their execution price.[68]

Feature	High-Fee "Active" Mutual Fund (Canada)	Low-Fee "Passive" ETF (Canada)
Avg. Asset-Weighted MER	1.47% (Often 2.0%+) [12, 14]	0.32% (Often 0.20% or less) [12, 22]
Primary Fee Structure	Bundled: Includes (high) management fee and (conflicting) embedded trailer fees.[37, 69]	Unbundled: Low management fee. No trailer fees on OEO platforms.[38, 39]
10-Yr Performance	~97% likelihood of UNDERPERFORMING the benchmark index.[47, 48]	Designed to MATCH the benchmark index, minus a minimal fee.
Tax Efficiency (Non-Registered)	Poor. Subject to "phantom" capital gains distributions caused by other investors redeeming units.[55, 57]	Superior. No phantom gains. Taxable events (capital gains) are only triggered when you sell.[54, 55, 56]
Holdings Transparency	Opaque. Disclosed quarterly.[62]	Transparent. Disclosed daily.[62, 63]
Trading & Liquidity	Illiquid. Priced once at end-of-day NAV.[62, 59]	Highly Liquid. Traded all day at live market prices.[64, 62, 59]

Step 1: Audit The Portfolio (Find The MER)

The first step for any investor is to diagnose the problem. This requires logging into their investment account (e.g., at their bank) and finding the "Fund Facts" document for every mutual fund they own. This document is required by regulators.[38, 70]

On that document, the investor must find the MER. If they see a fund code ending in "A" (A-series), they are almost certainly paying a high MER that includes a trailer fee.[69] If the MER is over 1.0%, it is too high. If it is over 2.0%, they are a victim of the massive wealth transfer calculated earlier.[16, 18]

Step 2: Embrace Simplicity with "All-in-One" ETFs

In the past, switching to ETFs meant an investor had to build a portfolio by buying 3-5 individual ETFs (e.g., Canadian, U.S., International, and Bonds). This portfolio would require periodic rebalancing.[71]

This "Canadian Couch Potato" philosophy [22, 72] has been revolutionized by Asset Allocation ETFs (also called "all-in-one" ETFs).[22, 71, 73] These are single ETFs that hold a complete, diversified portfolio of thousands of stocks and bonds from around the world. Critically, *they rebalance themselves automatically*. An investor simply has to buy one ticker.[22, 74]

The investor chooses their stock/bond mix based on their risk tolerance. For example [22]:

• 100% Equity (for long-term growth): VEQT, XEQT, ZEQT
• 80% Equity / 20% Bonds (Growth): VGRO, XGRO, ZGRO
• 60% Equity / 40% Bonds (Balanced): VBAL, XBAL, ZBAL

The MERs for these revolutionary products are typically just 0.20% to 0.24%.[20, 22]

Risk Profile	iShares Ticker (BlackRock)	Vanguard Ticker	BMO Ticker	Approx. MER
All-Equity (100/0)	XEQT	VEQT	ZEQT	0.20% - 0.24%
Growth (80/20)	XGRO	VGRO	ZGRO	0.20% - 0.24%
Balanced (60/40)	XBAL	VBAL	ZBAL	0.20% - 0.24%
Conservative (40/60)	XCNS	VCNS	ZCON	0.20% - 0.24%

(Source: Canadian Couch Potato [22])

Step 3: Choose The Platform (Go OEO)

An investor cannot (and should not) buy these low-cost ETFs from the same advisor who sold them the high-fee mutual funds. They must use an Order-Execution Only (OEO) discount brokerage.[75]

The action is to open an account at a low-cost platform. The two most popular in Canada are Wealthsimple [76, 77] and Questrade.[78, 79] Both platforms offer $0 commission ETF purchases.[78, 79] This means an investor can buy a fund like XEQT or VBAL and pay *only* the ~0.20% MER, with no trading fees, no trailer fees, and no account fees. (Note: Currency conversion fees for U.S.-listed stocks and ETFs are a separate issue to be mindful of [79, 80, 81]).

The final action is to transfer an existing RRSP or TFSA "in-kind" from the bank to the new OEO account. Once the assets arrive, the investor can sell the high-fee mutual funds (being mindful of any remaining Deferred Sales Charges (DSCs), though these are now banned for new sales [38, 39]) and buy their chosen all-in-one ETF.

The data is not ambiguous. It is overwhelming. The high-fee mutual fund industry in Canada is not designed to maximize investor returns; it is a $31-billion-per-year fee-extraction system [12, 14] built on a sales model with proven conflicts of interest [36] and justified by a promise of "active" outperformance that is empirically false for 97-99% of its products.[47, 48]

The choice to remain in a 2% MER fund is the choice to sacrifice over $219,000 in future wealth on a $100,000 portfolio, based on this model. It is a mathematically indefensible position. The alternative—a diversified, low-cost, all-in-one ETF with an MER of ~0.20%—is cheaper, more transparent, more tax-efficient, and statistically guaranteed to deliver a superior long-term net return than almost all of its high-cost competitors. The tools are available.[22, 73] The platforms are virtually free.[78, 79] The only remaining variable is investor action.