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The ETF market has tripled in size over the past few years, attracting new issuers to Canada to meet the massive investor demand. The key factor driving this explosive growth is ETF’s low fees. Canadian ETFs have little structural advantage over mutual funds, but their low fees undercut mutual fund’s fees across all asset classes.
In our recently published Canadian ETF Primer, we dove into the rise of ETFs in the Canadian market and best practices for ETF investing.
The Canadian ETF Landscape
While mutual funds still dominate the Canadian fund market, that may not be the case for long. Canadian ETFs have been steadily taking over mutual funds’ market share over the past decade.
ETFs claim nearly one-fourth of the fund market as of March 2025, compared with less than 10% just 10 years ago. Investors steadily poured more money into ETFs in recent years, a stark contrast to mutual funds’ two consecutive years of outflows in 2022 and 2023.
Most investors in ETFs use them as building blocks in their core portfolios. Broadly diversified stock and bond ETFs are among the most popular, with passive stock funds claiming over a half of the total ETF assets. All-in-one balanced ETFs are on the rise, but they have nowhere near the same prevalence as balanced mutual funds.
This trend might shift, as investors seem to prefer balanced ETF’s cheaper price tag and global focus. Recent consolidation of regulatory bodies can also broaden the availability of ETFs across different distribution channels.
For now, Canadian investors keep their money in stock and bond ETFs, particularly those “made in Canada.” Assets in Canada-oriented categories far outpace their relative weight in the global market for both asset classes.
While home bias is a common phenomenon around the globe, global diversification is still a good idea for Canadian investors. The Canadian market’s heavy reliance on banks and commodities can lead investors to take concentrated bets and overlook other important sectors.
ETFs Are Not Inherently Better Than Mutual Funds
The ETF vehicle does not have major structural advantages over mutual funds. Canadian ETFs and mutual funds receive the same capital gains tax treatment, unlike in the United States, where ETFs’ tax advantage is their main draw.
In Canada, investors should pay attention to a fund’s strategy instead of its vehicle. Index-tracking funds tend to have lower turnover, which generates fewer taxable events and capital gains distributions. Many ETFs passively track an index, but passive funds can exist in either an ETF or mutual fund wrapper.
One area where ETFs hold an upper hand over mutual funds is their ability to shield themselves from small inflows and outflows. Mutual fund managers must trade whenever an investor wants to buy or sell the fund, while ETF investors typically trade with one another on stock exchanges. This secondary market absorbs small investor trades, ultimately percolating into larger blocks of inflows and outflows that ETF managers can handle more efficiently.
ETFs’ Lower Fees Yield Better Outcomes
The popularity of ETFs in Canada is largely driven by their low fees. In most instances, ETFs are the cheapest way to access an investment portfolio. The average ETF charges just 0.66% in annual fees, undercutting most mutual fund counterparts. In comparison, mutual fund fees range from 0.97% for fee-based share classes up to nearly 2.00% for commission-based share classes on average. This advantage extends beyond broad passive ETFs. The average active ETF investor pays an annual fee of 0.82%, nearly half of the price charged by the average active mutual fund.
Though negotiated pricing on certain mutual fund share classes might lower their sticker prices, ETF investors still come out ahead on average. One instance where fund type doesn’t matter is within the same strategy. A fee-based share class and an ETF share class of the same fund usually charge the same fee.
Seeking low-cost funds has paid off for investors over the past five years. Cheaper ETFs have outperformed more expensive ones. They tend to survive longer than their more expensive counterparts as well.
Not All ETFs Are Cheap
High fees still bubble up in certain corners of the market, namely active and alternative ETFs. Expiring fee waivers and high operating cost contribute to higher management expense for alternative ETFs in recent years. But they have always been on the costlier side of the market. Despite the high cost, their investment merits are often unclear. Many of these funds are either volatile leveraged ETFs or covered-call funds that limit investors’ long-term upside potential.
Investors are often better off sticking with tried and true core ETFs over a long time horizon rather than chasing the latest fads. Some ETF trends lose their appeal faster than a market cycle can run its course. High-interest savings account ETFs drew major investor interest in 2022 and 2023, but the regulation loophole that gave them competitive yields closed in 2024 and stunted both their advantage and newfound popularity.
Investors interested in ETFs should start with the below list of Canadian ETFs assigned Medalist Ratings by Morningstar analysts.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
