ETFs cost less than mutual funds. That part is true and worth understanding. Canadian mutual fund Management Expense Ratios (MER) averaged ~1.47% in 2023 versus ~0.32% for ETFs^1,2, a gap that compounds meaningfully over time. But cost is one variable, not the only one. The question worth asking is, "Which investment approach, paired with the right level of professional guidance, actually serves my goals?"

Understanding your options: Three fund types, three different purposes

Before comparing costs, it helps to be clear about what each vehicle does. 

• Mutual funds pool your money together with other investors to buy stocks, bonds and other investments "mutually" and are managed by professional portfolio managers. They can be either actively or passively managed, accommodating a wide range of risk profiles. Passive approaches such as low-cost index tracking aims to match the performance of a benchmark while active strategies such as a fixed-income mandate or growth-oriented equity strategies target performance above their stated benchmarks. Regardless of approach, they are priced once per day at net asset value and carry no principal guarantee.
• Exchange-traded funds (ETFs) trade on stock exchanges like individual securities, which means they can be bought or sold throughout the trading day. The majority track a market index passively, holding whatever the index holds in the same proportions. This keeps costs low. ETFs are an excellent tool for cost-conscious investors who want broad diversification and are comfortable with index-level performance. While there are some ETFs that are actively managed, the majority attempt to deliver performance relative to their benchmarks.
• Segregated funds are investment products offered exclusively by insurance companies, governed under insurance rather than securities legislation. Their defining feature is a principal guarantee at maturity or death — typically 75% to 100% of invested capital — which makes them particularly relevant for risk-averse investors and those with estate planning objectives. The guarantee comes with an embedded insurance cost, which is why segregated funds' MERs are higher than mutual funds and ETFs.

What active management means and why it matters

When a portfolio manager runs an actively-managed mutual fund, they conduct ongoing, rigorous analysis of the companies and markets in which they invest. A passive index fund does not do this by design. Here are four examples to illustrate the substance of this work:

• Currency hedging: A Canadian investor holding international equities carries not just company risk, but currency risk. An active manager can adjust the portfolio's exposure to exchange rate movements based on current conditions.
• Balance sheet quality analysis: A rigorous active manager examines features of individual companies balance sheet, such as the ratio of debt to equity, asset quality, and a company's capacity to weather a downturn, before taking a position. A rules-based index simply includes companies that meet its criteria, structural vulnerabilities and all.
• Cash flow analysis: Active managers focus on a company's free cash flow (the real money generated after capital expenditures) as a more reliable indicator of long-term value than reported net income.
• Management interviews: Some of the most revealing insights about a company come from direct conversations with its leadership, not their financial statements. Experienced portfolio managers assess executive credibility and strategic discipline as part of their process. This is qualitative due diligence that a passive strategy cannot offer.

None of this analysis is reflected in the MER comparison. It is the labour that justifies the fee structure, and is precisely the kind of work that an index ETF, by construction, does not perform.*

*Active management is not a guarantee of outperformance

Investment vehicles at-a-glance

All figures below are industry benchmarks for educational purposes; individual fund costs will vary.

Meet your goals with the right conversation

Understanding your investments cost is a meaningful starting point. Understanding what you are getting for that cost, including the professional analysis, ongoing monitoring, and strategic guidance that an engaged advisor provides is empowering. Schedule a portfolio review with your Edward Jones financial advisor to ensure you are still on track to meet your financial goals.