If you’re deciding between ETFs, mutual funds or index funds, the key is to understand how they each actually work and which one will suit your financial goals.
In this guide, we’ll break down their standout features, how they’re traded, the different management styles and what they’ll cost you. By the end of this article, you’ll be ready to make a confident decision that best suits your investing style. So let’s dive in.
Money.ca takeaways
- ETFs and index funds: Lower costs, passive management and predictable returns make them ideal for cost-conscious, long-term investors.
- Mutual funds: Professional management offers potential for higher returns but with higher fees and lower tax efficiency.
- The right choice: Consider your goals, risk tolerance and trading preferences to find the best fit.
What are index funds and their benefits?
Index funds are designed to track market indices like the S&P 5001, aiming to match the market’s returns instead of beating them.
Benefits:
- Passive management = lower fees and expense ratios
- Built-in diversification spreads your risk
- Perfect for long-term investors who like to keep things simple and affordable
Related read: What is an Index fund?
What are ETFs and their benefits?
ETFs (Exchange-Traded Funds) trade on stock exchanges just like individual stocks. That means you get intraday trading and real-time pricing at your fingertips.
Benefits:
- They’re tax-efficient and easy on your budget with low costs
- Flexibility lets you react to market changes in real time
- No minimum investments — making them super beginner-friendly
Related read: What is an ETF?
What are mutual funds?
Mutual funds are actively managed, pooled investments aiming to outperform the market (this doesn’t always happen though).
Benefits:
- A team of pros manages everything, making them great for hands-off investors
- Diversified portfolios help lower risks
- Potential for higher returns in strong markets, though it’s never a guarantee
Related read: What is a mutual fund?
What they all have in common
As you can tell, ETFs, mutual funds and index funds actually all have a lot in common, which is why they’re so popular with investors:
- Diversification: All three give you exposure to a wide range of securities, so you’re not putting all your eggs in one basket (or relying on just one stock or bond to perform).
- Professional management: Whether it’s a seasoned pro or an algorithm calling the shots, these funds handle the heavy lifting when it comes to research and decision-making.
- Accessibility: Beginner-friendly and easy to access through most major brokerages, making it simple for anyone to get started.
What new investors care about most and why
When you’re just starting out, here are the features you’ll care about the most:
- Low-cost: High fees can eat into your returns, especially if your portfolio is small. ETFs and index funds are clear winners here with their super low expense ratios.
- Hands-off: If you want a “set it and forget it” approach, index funds and mutual funds are great options. They let you grow your money without needing to obsess over daily market moves.
- Investment options: These funds offer broad exposure to markets, sectors and industries, so you can align your investments with your goals and how much risk you’re comfortable taking.
ETF vs. mutual fund vs. index fund: Key differences
- Lower fees: At just 0.37% total, you’ll pay a fraction of what traditional mutual funds cost.
- Expert management: A team of pros actively manages your portfolio, so you can sit back and relax.
- More wealth over time: Those lower fees? They stay invested, helping your money grow faster — up to 50% more over time!
With Questwealth Portfolios2, you don’t have to stress about picking between ETFs, mutual funds, or index funds — they’ve got it covered with low-cost, managed investing that works for you.
With as little as $250, you can let Questwealth Portfolios start optimizing your wealth. Why overthink it when the pros can do all the work for you?
Pros and cons of ETFs vs mutual funds vs. index funds
When you’re trying to choose between ETFs, mutual funds and index funds, it’s all about understanding how they’re bought and sold.
Each has its own unique perks and features, and exploring these differences can help you figure out which one lines up best with your investment goals and how you like to trade.
Buying and selling ETFs
Pros
-
Flexibility: Trade throughout the day at market prices
-
Tax efficiency: Lower capital gains due to in-kind processes
-
Low costs: Typically the lowest expense ratios
-
No minimums: Buy as little as one share
Cons
-
Transaction fees: May incur brokerage commissions
-
Price volatility: Intraday price changes may impact returns
-
Complexity: Requires understanding of market timing
Buying and selling mutual funds
Pros
-
Simplicity: Trades executed at NAV with no intraday pricing
-
Professional management: Hands-off, expert-managed portfolios
-
No trading commissions: Many funds avoid transaction fees
Cons
-
Limited flexibility: Priced only at the end of the day
-
High costs: Higher management fees and expense ratios
-
Minimum investments: Often requires $500-$3,000 to start
Buying and selling index funds
Pros
-
Low costs: Expense ratios lower than actively managed funds
-
Passive management: Consistent, minimal-effort returns
-
Broad diversification: Exposure to entire markets or sectors
Cons
-
Limited trading flexibility: Priced only at NAV once daily
-
Minimum investments: Typically requires $500-$3,000
-
Tracking error: May not perfectly replicate the index
Which investment type is best for you?
Diversification and balance
Mixing ETFs, mutual funds and index funds can give you the best of all worlds. ETFs and index funds bring low-cost diversification to the table, while mutual funds add an active management touch that can complement passive strategies.
By blending all three, you can customize your portfolio, balance risk and work toward optimizing your returns.
Opening a brokerage account to buy ETFs, mutual and index funds
If you’re ready to start investing in ETFs, mutual funds or index funds, opening a brokerage account is your first step.
Here’s a beginner-friendly guide to help you get started, including tips on using robo-advisors for automated investing.
1. Research fees, platforms and tools
Finding the right platform is all about matching your investing style and budget. Here’s what to look for:
- Low fees: Keep more of your money working for you with platforms like Questrade and Wealthsimple, known for their budget-friendly options.
- Usability: Choose a platform that’s easy to navigate, especially if you’re a beginner.
- Tools: Advanced features like research tools and real-time data are great if you want to dig into your investments.
2. Choose a brokerage
Pick the brokerage that aligns with your needs. See our full walk-though at best trading platforms and brokerages in Canada.
If you want to buy mutual funds, your best bet is typically a big six bank brokerage, who typically make the mutual funds. If you're a beginner, check out TD Easy trade for mobile-friendliness and ease-of-use or CIBC investor's edge for the lowest trading fees of the big banks.
3. Consider robo-advisors for automated investing
Not into managing your own investments? No problem. Robo-advisors like Questwealth Portfolios and Wealthsimple Invest do the heavy lifting for you.
- Questwealth Portfolios: Low-cost (0.37% total fees), expert-managed ETF portfolios tailored to your goals, with the potential to grow wealth up to 50% faster thanks to lower fees.
- Wealthsimple Invest: Start with as little as $1, enjoy a user-friendly app, and choose from portfolios tailored to growth, balanced, or conservative strategies. They even offer Halal and socially responsible investing options.
4. Set up your account and deposit funds
Once you’ve chosen a platform:
- 1 Provide your personal information (e.g., ID and employment details).
- 2 Link your bank account for seamless transfers.
- 3 Make your initial deposit — some platforms let you start with as little as $1, while others might require $1,000 or more.
5. Start investing
With your account funded, you’re ready to invest. Use your platform of choice tools to explore ETFs, mutual funds, or index funds that fit your goals, risk tolerance and timeline.
Once you’ve selected your investments, sit back and let your money start working for you. Remember, investing is a marathon, not a sprint — stay consistent, keep learning and watch your portfolio grow over time.
Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.
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