Index funds and ETFs are often confused because they both track market indexes. While they share the same goal — giving you broad market diversification at low cost — they differ in how you buy them, what they cost, and how they fit into your investing strategy. This comparison works best alongside our broader ETFs and index funds hub.
Index fund vs ETF comparison
| Feature | Index ETF | Index Mutual Fund |
|---|---|---|
| Trades on exchange | Yes (buy/sell anytime) | No (end-of-day pricing) |
| Typical MER | 0.06%–0.25% | 0.30%–0.80% |
| Purchase method | Through brokerage | Through bank or fund company |
| Minimum investment | Price of one share (or $1 with fractional) | Often $100–$500 |
| Automatic investing | Manual (or set up recurring) | Easy automatic purchases |
| Commission | Usually $0 at online brokerages | Usually $0 |
| Dollar-amount purchases | Fractional shares at some brokers | Yes (buy exact dollar amounts) |
| Tax efficiency | More tax-efficient | Slightly less tax-efficient |
How index ETFs work
An index ETF trades on the stock exchange just like a stock. You buy and sell shares through a brokerage at the current market price. Each share represents a basket of stocks that tracks a specific index. For a beginner-friendly overview, see our Canadian ETF guide.
Example: XEQT is an all-in-one equity ETF that tracks the global stock market. One share costs approximately $30 and gives you exposure to over 9,000 stocks.
To buy an index ETF:
- Open a brokerage account
- Deposit money
- Search for the ETF ticker (e.g., XEQT)
- Place a buy order for a specific number of shares
How index mutual funds work
An index mutual fund is purchased directly from the fund company (or through your bank). You specify a dollar amount, and the fund issues you units at the end-of-day net asset value (NAV).
Example: TD Canadian Index Fund – e (TDB900) tracks the S&P/TSX Composite index. You can invest any amount starting from $100.
To buy an index mutual fund:
- Open an account at the fund company or bank
- Deposit money
- Select the fund
- Enter the dollar amount you want to invest
If you decide the ETF route is better, follow our step-by-step guide on how to buy ETFs in Canada.
MER comparison
The fee difference between ETFs and index mutual funds is small compared to actively managed mutual funds, but it still compounds over time.
| Fund Type | Typical MER | Annual Cost on $100,000 |
|---|---|---|
| Index ETF (XEQT) | 0.20% | $200 |
| Index mutual fund (TD e-Series) | 0.30%–0.50% | $300–$500 |
| Active mutual fund | 2.00%–2.50% | $2,000–$2,500 |
Over 25 years, the MER difference between the ETF and index mutual fund costs thousands in lost returns. Use our MER calculator to model the impact.
When to choose an ETF
- You have a brokerage account (Wealthsimple, Questrade, etc.)
- You want the lowest possible MER
- You are comfortable buying specific numbers of shares
- You want to trade during market hours
When to choose an index mutual fund
- You want to invest exact dollar amounts automatically
- You do not have a brokerage account and prefer your bank
- You want to set up recurring automatic contributions easily
- Simplicity is your top priority
Tax efficiency of ETFs vs mutual funds
In a non-registered account, ETFs are more tax-efficient than index mutual funds because:
- ETFs do not trigger capital gains distributions — when an ETF rebalances, it usually does so through “in-kind” creation/redemption units, not taxable sales
- Mutual funds must distribute capital gains to all unitholders when they sell holdings to meet redemptions — you could receive a capital gains distribution even if you did not sell
For investments inside a TFSA or RRSP, this distinction does not matter — all growth is sheltered regardless.
Canadian index fund options (non-ETF)
For investors who prefer the mutual fund model, these low-cost Canadian index funds are available directly from financial institutions:
| Fund | Provider | Tracks | MER |
|---|---|---|---|
| TD Canadian Index Fund – e (TDB900) | TD | S&P/TSX Composite | 0.31% |
| TD US Index Fund – e (TDB902) | TD | S&P 500 | 0.33% |
| RBC Canadian Index Fund | RBC | S&P/TSX Composite | 0.66% |
| Manulife Cdn Stock Index | Manulife | S&P/TSX Composite | 0.67% |
The TD e-Series funds are the most popular bank-based index mutual funds. They can be purchased in exact dollar amounts through EasyWeb with automatic monthly contributions — ideal for investors who find ETF purchases more complicated.
Note: TD e-Series funds are only available if you have a TD bank account. Other big-bank index funds (RBC, Manulife) tend to have higher MERs and are generally not recommended for cost-conscious investors compared to ETF alternatives.
The best option for most Canadians
For most investors, index ETFs through a commission-free brokerage offer the best combination of low cost and simplicity. With Wealthsimple offering fractional shares and automatic deposits, many of the traditional advantages of mutual funds (dollar-amount purchases, automation) are now available with ETFs too.
If you are ready to start, see our guide on how to build a Couch Potato Portfolio using index ETFs.