Why Exchange-Traded Funds (ETFs) are a good alternative to Mutual Funds

Article written by Jennifer Black and Dedicated Financial Solutions.

Why Exchange-Traded Funds (ETFs) are a good alternative to Mutual Funds

In Canada, exchange-traded funds (ETFs) are becoming the low-cost investment vehicle of choice.

Like mutual funds, ETFs offer the opportunity to invest in a portfolio of securities.

Most mutual funds in Canada are actively managed funds, which try to outperform the market. ETFs in Canada are primarily passively managed index investments. They seek to track the performance of a broad market benchmark or specific portion of the benchmark. ETFs invest in all or a representative sample of the securities of the indexes they seek to track.

Advantages of ETFs

  • Low Costs. ETFs have lower management expense ratios than actively managed mutual funds.
  • Tax Efficiency. The turnover in ETFs is typically lower than that of actively managed funds which will result in tax efficiencies. Also, with traditional mutual funds, the buying and selling activities of some unitholders can trigger capital gains distributions for all of the fund’s unitholders. This does not happen with ETFs.
  • Transparency. Most ETFs publish their exact holdings on a daily basis, so you can always know what you own. Most mutual funds only disclose their holdings quarterly.
  • Trading Flexibility. ETFs are traded on a stock exchange, so they can be bought and sold any time the exchange is open. Investors can use stock-trading techniques such as stop and limit orders. Mutual funds can only be bought and sold at the end of the day, after the exchange closes.
  • Diversification. Most index ETFs are designed to be as diversified as the original indexes they are tracking and can provide greater diversification than an individual investor may achieve independently.
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