Going beyond the 'ETFs vs. mutual funds' debate

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In other words, if the Canadian investment fund industry were an investment portfolio, it would reflect an 85-15 asset split between mutual funds and ETFs, even as the net sales and gross sales figures show a 75-25 and 70-30 split, respectively.

“ETFs are continuing to grow as clients and advisors become more aware of the benefits of ETF investing, but it’s growing more in line with what you see in other markets,” he said. “Saying that, mutual funds remain the most commonly used vehicle in Canada, especially among investors with $25,000 to $50,000 to invest.”

With a multi-decade head start over ETFs, it’s hardly surprising how entrenched mutual funds are among Canadian investors. But for people who look for lower cost-solutions to take strategic positions, or want precision tools for tactical exposures to a short-term investment view, Hartman said index ETFs offer a good choice.

“We think index ETFs make sense for allocations in heavily analyzed areas of the market,” he said. “For example, the U.S. equity market gets a lot of attention from advisors, analysts, and portfolio managers, so it may be harder to generate alpha from active management.  Conversely, there may be more opportunity to add value in areas like credit and emerging-market equities.”

Redemptions prompted by decisions to switch between markets or asset classes, Hartman said, are a perfect example of why mutual fund outflows don’t necessarily reflect pessimism on mutual funds. There’s also the fact that investment funds see a natural level of outflows every year as investors run up against life-related expenses – funding retirement or buying a home, for example.