Demand for active ETFs is growing among Canadian investors

But the infrastructure behind mutual funds is much more costly than for ETFs. That’s helped J.P. Morgan, which has until now focused on institutional clients in Canada, to offer investment products for advisers and retail investors, said Hughes.

“To have mutual funds, you have to have a fund account and there’s other costs associated with that, but with the ETF, it simplifies that process.”

Cost is a key reason why active ETFs are gaining momentum, with average management expense ratios of 0.53%, according to Bloomberg, whereas mutual fund fees are typically higher than 1%.

Advantages other than the cost factor include transparency of what’s in the fund, the ability to trade ETFs throughout the day, and tax advantages. Because most trading for ETFs is on the secondary market, there’s less rebalancing and selling of stock needed, meaning fewer capital gains distributed to investors, said Hughes.

ETFs are driving growth in the fund industry

The difference helped see ETFs of all kinds gain $33 billion in new assets in the first six months of the year, while mutual funds saw outflows of $8 billion, according to a TD Securities report.

The trend is growing enough in Canada and elsewhere that MFS Investment Management, the inventor of the mutual fund a century ago, announced plans to launch its first active ETFs in the U.S.

But while active ETFs are less expensive than mutual funds, passive ETFs that just track an index are even cheaper, with some charging around 0.05%. 

Passive investing has gained ground during a decade of strong returns for major indexes like the S&P 500, making it challenging to beat the market, Hughes acknowledged.