ETF vs. mutual fund vs. index fund: What’s the best choice for you?

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

Feature

ETFs

Mutual Funds

Index Funds

Cost (expense ratios)

Typically the lowest, starting as low as 0.03%

Higher, averaging around 0.5%-2.0% for active funds

Low, but slightly higher than ETFs, averaging 0.05%-0.10%

Flexibility

Trade throughout the day, like stocks

Priced once daily at NAV (end of the trading day)

Priced once daily at NAV, similar to mutual funds

Tax efficiency

Highly tax-efficient due to in-kind transactions

Less tax-efficient due to frequent trading by managers

Moderate tax efficiency, with fewer taxable events than mutual funds

Investment minimums

No minimums; buy as little as one share

Often requires minimums between $500 and $3,000

Minimums range from $500 to $3,000, depending on the fund

Use cases

Best for: Passive and active investors; flexible budgets

Best for: Hands-off investors seeking professional management

Best for: Passive, cost-conscious, long-term investors

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

Buying and selling mutual funds

Buying and selling index funds

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. 1 Provide your personal information (e.g., ID and employment details).
2. 2 Link your bank account for seamless transfers.
3. 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.