Differences between ETFs and Traditional Mutual Funds
- ETFs offer many of the advantages of index mutual funds, such as the ability to obtain exposure to broadly diversified asset classes through a single trade, combined with additional advantages that come from a fund that trades like a stock on an exchange.
- ETFs can be a very cost-effective way to build a diversified portfolio.
- There are a wide variety of ETFs out there, covering many sectors, asset classes and market capitalization.
- Because of lower asset turnover ETFs tend to be more cost- and tax-efficient than traditional mutual funds.
| Exchange Traded Funds(ETFs) | Traditional Mutual Funds | |
|---|---|---|
| Pricing | Throughout the trading day | Once per day using closing prices for fund net asset value |
| Short selling | Yes – investors can hold long or short positions | No – long positions only |
| Limit and Stop Orders | Yes – investors can request their own price to execute any trade, however, there are no execution guarantees | No – the only price available is the net asset value (NAV) per unit |
| Good-til Orders | Yes – at Disnat and Disnat Direct, investors can leave an order open for up to 30 days |
No – any order entered will be traded on that day (or the next business day, if markets are closed). |
| Cost (MERs) | Low – MERs are typically under 1% | Varies – MERs are typically between 1.5% and 3% |
| Portfolio turnover | Very low (leading to lower taxable distributions) | Varies according to manager style (high turnover leads to high taxable distributions) |
| Marginable (ability to leverage) | Yes – standard security margin rules apply | Yes – maximum loan value of 50% |
| Disclosure of portfolio holdings | High – holdings disclosed daily for most ETFs | Low – holdings typically disclosed semi-annually |
Source: Barclays Global Investors Canada Limited. Used with permission. Adapted for use by Desjardins Online Brokerage.