ETF vs. Index Fund: Which One Should You Choose?

Robb Engen Author

Updated Mar 5, 2025

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Exchange-traded funds (ETFs) and index mutual funds are two of the most popular investment options for passive investors.

They offer broad market exposure, low fees, and the potential for long-term growth (i.e. all the things you want for your retirement).  

But which one is right for you? This guide breaks down the key differences, advantages, and drawbacks of ETFs and index funds to help you make an informed decision.

Index investing: The basics

Before diving into the differences, it's important to understand what ETFs and index mutual funds have in common.

Both are passive investment strategies that aim to track a specific market index, like the S&P 500 or TSX Composite, rather than attempting to beat the market.

Passive investing has been proven to outperform actively managed strategies over the long term. By simply mirroring an index and minimizing costs, both ETFs and index funds offer an efficient way to build wealth with less risk than stock-picking.

Tax efficiency is another shared characteristic, though there are differences in how they are structured. In Canada, ETFs and mutual funds are treated similarly when it comes to capital gains taxes and withholding tax on foreign dividends.

  • Are index mutual funds the same as index funds?

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    Index mutual funds are a type of index fund, but they operate differently from index ETFs:

    Index mutual funds are bought and sold directly through a fund provider (e.g., Vanguard or a bank), and trades are executed at the end of the day at the fund’s net asset value (NAV).

    Index ETFs trade on stock exchanges like individual stocks, with prices fluctuating throughout the day.

    So, all index mutual funds are index funds, but not all index funds are mutual funds — some are ETFs.

Key differences between ETFs and index funds

ETFs Index funds
Trading: Traded on stock exchanges throughout the day, like individual stocks Trading: Bought and sold through a mutual fund provider at the end of the day
Costs: Typically lower management fees (MERs) but may include brokerage fees Costs: No transaction fees, but often higher MERs
Minimum investment: Can buy as little as one share; some brokers offer fractional shares Minimum investment: Often require a minimum initial investment (e.g., $500 - $1,000)
Tax efficiency: More tax-efficient due to in-kind creation/redemption process Tax efficiency: May generate capital gains distributions, triggering taxable events
Flexibility: Can use limit orders, stop-losses, and margin trading Flexibility: Less flexibility; trades are executed only once per day
Best for: Investors looking for low fees and flexibility Best for: Investors making small, frequent contributions

Real life comparisons of an Index ETF vs a Index mutual fund

Let's look at two of the most popular indices and the fund that track them. 

Index mutual fund Index ETF
TD U.S. Index Fund – e-Series (TDB902) iShares Core S&P 500 ETF (IVV)
MER: 0.28% MER: 0.03%
Buy with TD Easy Trade Buy with Wealthsimple
Track all markets on TradingView

Index mutual fund Index ETF
RBC Canadian Index Fund (RBF556) iShares S&P/TSX 60 Index ETF (XIU)
MER: 0.66% MER: 0.18%
Buy this mutual fund with RBC Direct Investing Buy with Wealthsimple
Track all markets on TradingView

The difference fees make in your portfolio

Don't be a Sam, be a Raquel.

Advantages of ETFs over index funds and the downsides of ETFs

Pros

Pros

  • Lower fees. ETFs generally have lower expense ratios than index mutual funds. For example, Vanguard’s Canada All Cap Index ETF (VCN) charges just 0.06% in MER. Lower fees mean more of your money stays invested and compounds over time.

  • More investment choices. ETFs offer access to a wide variety of sectors and investment styles, from broad market indices to niche categories like technology, dividends, or REITs.

  • Greater flexibility. Since ETFs trade like stocks, investors can buy or sell them at any point during the trading day, use limit orders, and even short sell or trade on margin.

  • All-in-one portfolio solutions. All-in-one ETFs, like asset allocation ETFs from Vanguard, iShares, and BMO, provide a globally diversified portfolio in a single fund with an MER as low as 0.18%–0.25%.

Cons

Cons

  • Brokerage fees. Many brokerages charge trading fees for buying and selling ETFs, making them less ideal for small, frequent contributions.

  • Market fluctuations. Because ETFs trade throughout the day, their prices fluctuate, which can lead to emotional decision-making for inexperienced investors.

Advantages of index funds over ETFs and the downsides of index funds

Pros

Pros

  • No trading fees. Most index mutual funds can be purchased without commissions, making them ideal for investors who contribute small amounts regularly.

  • Easy automation. Investors can set up automatic contributions to buy index funds on a regular schedule, making it a great tool for dollar-cost averaging.

  • Simplicity. No need to worry about bid-ask spreads or placing market orders—index fund purchases are straightforward and executed at the day’s closing price.

Cons

Cons

  • Higher MERs. While still cheaper than actively managed funds, index mutual funds generally have higher MERs than ETFs.

  • Limited selection. The Canadian market offers fewer index mutual funds compared to the growing variety of ETFs.

  • Less control. Investors can only buy and sell at the end of the trading day, limiting flexibility in volatile markets.

ETF vs. index fund: Which one is right for you?

Here's some simple rules of thumb:

  • If you're investing small amounts frequently (e.g., biweekly contributions to your RRSP or TFSA), index mutual funds may be the better choice since they come with no trading fees.
  • If you have a larger portfolio ($25,000+), want lower costs, and prefer more control, ETFs are the smarter option.

Looking for a hands off approach?

Then you should consider robo-advisors like Wealthsimple, Moka or Questwealth, which build and manage diversified ETF portfolios for you.

Final thoughts

Both ETFs and index funds offer low-cost, diversified exposure to the stock market, making them excellent choices for long-term investors. The best choice depends on your investing style, contribution frequency, and cost sensitivity.

If you’re ready to start investing, choose a commission-free brokerage or a robo-advisor to simplify the process. Either way, taking the passive investing route puts you on a solid path toward long-term financial growth.

FAQ

  • Is an ETF better than an index fund?

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    It depends on your investment style. ETFs typically have lower fees, trade like stocks, and are more tax-efficient, making them ideal for cost-conscious investors. Index mutual funds allow for automatic contributions and don’t require a brokerage account, which suits set-it-and-forget-it investors. ETFs are often the better choice for flexibility and lower costs.

  • Is the S&P 500 index fund an ETF?

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    Not necessarily. An S&P 500 index fund can be either a mutual fund or an ETF, as long as it passively tracks the S&P 500. For example, Vanguard S&P 500 ETF (VOO) is an ETF, while Vanguard 500 Index Fund (VFIAX) is a mutual fund. The difference lies in trading methods, fees, and tax efficiency.

  • What is better: an S&P 500 ETF or a mutual fund?

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    An S&P 500 ETF is typically better for most investors because it has lower fees, trades throughout the day, and is more tax-efficient. S&P 500 mutual funds are better for those making small, frequent contributions without worrying about trading commissions. If costs matter, the ETF is the smarter choice over time.

  • Is it better to invest in stocks or ETFs?

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    ETFs are better for most investors because they provide instant diversification, lower risk, and professional fund management. Individual stocks can offer higher returns, but they require research, time, and discipline. If you want a hands-off, diversified approach with lower risk, ETFs are the better option. Stocks work best for experienced investors.

Robb Engen Author

Robb Engen is a leading expert in the personal finance realm of Canada and is also the co-founder of Boomer & Echo, an award-winning personal finance blog.

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