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Maple Wealth Guide provides general financial education only. We do not offer financial, investment, tax, or legal advice. Nothing on this website should be considered a recommendation. Always consult a licensed professional for personalized guidance.
ETFs vs Index Funds: What's the Difference?
Both ETFs (Exchange-Traded Funds) and index mutual funds aim to track market indexes and provide low-cost, diversified investing. However, they achieve this goal through different structures, which creates meaningful differences for investors.
Exchange-Traded Fund (ETF)
An ETF trades on a stock exchange like individual stocks. You buy and sell shares at market prices throughout the trading day through a brokerage account.
- • Trades throughout the day
- • Requires brokerage account
- • Priced at market value
- • May require whole shares
Index Mutual Fund
An index mutual fund is purchased directly from the fund company at the end-of-day net asset value (NAV). You can often buy directly or through your bank.
- • Trades once per day at NAV
- • Can buy through bank/fund company
- • Priced at net asset value
- • Can buy fractional amounts
Same Destination, Different Vehicles
Both ETFs and index mutual funds can track the same index (e.g., the S&P/TSX 60). The difference is in how you buy and sell them, not in what they own. A Canadian equity ETF and a Canadian equity index fund might own the exact same stocks.
Key Differences at a Glance
| Feature | ETFs | Index Mutual Funds |
|---|---|---|
| Trading | Throughout the day | Once per day at NAV |
| Minimum Investment | One share (~$20-100) | Often $500-10,000 minimum |
| Fractional Shares | Limited availability | Yes, can invest any amount |
| Automatic Investing | Requires manual trades | Easy automatic contributions |
| MER (Management Fee) | Generally 0.03-0.25% | Generally 0.10-0.50% |
| Trading Costs | Commission (often $0 now) | Usually no commission |
| Tax Efficiency | Generally more efficient | May distribute more gains |
| Bid-Ask Spread | Yes, affects cost | No spread |
Cost Comparison: The Real Numbers
Costs are one of the most important factors when choosing between ETFs and index funds. Let's break down all the costs involved.
Management Expense Ratio (MER)
The MER is the annual fee charged by the fund, expressed as a percentage of assets. ETFs generally have lower MERs than their mutual fund equivalents.
| Index | ETF Example | ETF MER | Mutual Fund Example | MF MER |
|---|---|---|---|---|
| S&P/TSX Composite | VCN (Vanguard) | 0.05% | TD e-Series Canadian Index | 0.28% |
| S&P 500 | VFV (Vanguard) | 0.09% | TD e-Series US Index | 0.35% |
| International | XEF (iShares) | 0.22% | TD e-Series International | 0.47% |
| Canadian Bonds | ZAG (BMO) | 0.09% | TD e-Series Bond Index | 0.44% |
On a $100,000 portfolio, the difference between 0.05% and 0.28% MER is $230 per year. Over 20 years, that adds up to significant savings.
Trading Costs
ETFs require brokerage trades, while mutual funds can be purchased directly:
- Questrade: Free ETF purchases, $4.95-9.95 to sell
- Wealthsimple Trade: Free ETF trading
- TD Direct: $9.99 per trade for most ETFs
- TD e-Series Funds: No trading commissions
Bid-Ask Spread (ETFs Only)
When you buy an ETF, there's a small difference between the buying price (ask) and selling price (bid). For large, liquid ETFs like VCN or ZAG, this spread is typically 0.01-0.05%. For less liquid ETFs, it can be 0.10-0.50%.
The Cost Winner
For most investors, ETFs win on costs—especially for lump-sum investing or less frequent trading. However, if you're making frequent small contributions (e.g., $200 monthly), the convenience of index mutual funds may outweigh the slightly higher MER.
Tax Efficiency Comparison
In non-registered (taxable) accounts, tax efficiency matters. ETFs generally have a structural advantage here.
Why ETFs Are More Tax-Efficient
ETFs use an "in-kind creation/redemption" process that allows them to avoid selling securities when investors redeem. This means:
- ETFs rarely distribute capital gains to shareholders
- You control when you realize gains by choosing when to sell
- Mutual funds must sell holdings to meet redemptions, creating taxable events
- You may owe taxes on gains even if you didn't sell
When Tax Efficiency Doesn't Matter
In registered accounts (RRSP, TFSA, RRIF), tax efficiency is irrelevant—no taxes are owed on transactions within these accounts. If most of your investing is in registered accounts, this advantage disappears.
Foreign Withholding Taxes
Both ETFs and index funds holding foreign stocks may be subject to withholding taxes on dividends. The treatment varies by account type and fund structure. In RRSPs, U.S. stocks are exempt from the 15% withholding tax, making U.S.-domiciled ETFs slightly more efficient.
Accessibility in Canada
How easily can you access ETFs and index funds as a Canadian investor?
ETF Accessibility
- Require a brokerage account (Questrade, Wealthsimple, bank brokerages)
- Free to open an account with most discount brokerages
- Hundreds of Canadian-listed ETFs available
- Some brokerages offer commission-free ETF trading
- Must trade during market hours (9:30 AM - 4:00 PM ET)
Index Fund Accessibility
- TD e-Series: Available through TD Direct Investing or TD Mutual Fund accounts
- RBC Index Funds: Available through RBC
- Many bank "index" funds have high MERs (1%+)—avoid these
- True low-cost index funds have limited availability in Canada
TD e-Series: The Best Index Fund Option
TD e-Series funds are the most accessible true low-cost index funds in Canada. With MERs around 0.28-0.50%, they're not as cheap as ETFs but offer the convenience of automatic contributions and fractional share purchases. They're particularly good for systematic monthly investing.
Which Should You Choose?
The best choice depends on your specific situation. Here's a decision framework:
Choose ETFs If:
- You're making lump-sum investments (e.g., annual RRSP contribution)
- Minimizing costs is your top priority
- You're investing in a non-registered account (tax efficiency matters)
- You're comfortable using a discount brokerage
- You want access to the widest selection of funds
- You don't need automatic contributions
Choose Index Mutual Funds If:
- You want to automate regular contributions (e.g., $500/month)
- You prefer the simplicity of buying through your bank
- You're investing smaller amounts where trading fees matter
- You want to invest exact dollar amounts
- Most of your investing is in registered accounts
- Convenience is more important than the last 0.1% in fees
Our Recommendations for Canadian Seniors
Based on our analysis, here's what we recommend for most Canadian seniors:
For Most Retirees: ETFs Win
If you're in retirement and making periodic lump-sum transactions (e.g., annual RRSP-to-RRIF conversions, rebalancing), ETFs' lower costs make them the better choice.
Recommended ETF Portfolio
- • VCN (0.05% MER) - Canadian stocks
- • XAW (0.22% MER) - International stocks
- • ZAG (0.09% MER) - Canadian bonds
- Blended MER: ~0.12% (vs ~0.35% for TD e-Series equivalent)
For Hands-Off Simplicity: All-in-One ETFs
All-in-one ETFs like VBAL, VCNS, or XINC provide a complete portfolio in one fund with automatic rebalancing. At 0.20-0.24% MER, they're still cheaper than most index mutual fund portfolios.
For Regular Contributions: Consider Both
If you're still working and making regular monthly contributions, consider using TD e-Series for the convenience of automatic investments. When you retire and switch to withdrawals, you can transfer to ETFs.
The Bottom Line
For Canadian seniors, the ETF vs index fund debate usually favors ETFs due to lower costs and better tax efficiency. However, either option is dramatically better than high-fee actively managed funds. A portfolio of TD e-Series funds at 0.35% MER is still far superior to a 2% MER actively managed fund.
Sources Referenced
The educational information in this guide is based on publicly available resources from official Canadian institutions:
Related Educational Guides
Investing in Canada for Beginners
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Learn MoreRRSP & TFSA for Canadians 50+
Understand how these registered accounts work for retirement.
Learn MoreRetirement Investing for Seniors
Explore investment considerations for Canadians near retirement.
Learn MoreAbout Maple Wealth Guide
Maple Wealth Guide is an independent Canadian financial education website. Our team of educational writers researches and explains investment concepts, retirement-related topics, and personal finance information for Canadians aged 50 and over. We are not licensed financial advisors and do not provide personalized recommendations. All content is for educational purposes only.