Mutual funds and ETFs: how they work and what they cost

Updated November 2026

A mutual fund or ETF pools money from many investors and buys a basket of stocks, bonds or both. You get instant diversification – but you pay a yearly fee for it, and that fee is the single biggest thing you control.

How they work

When you buy a fund you own units of the whole basket. If the basket goes up 5%, so do your units, minus the fund's costs.

Mutual funds are bought and sold through the fund company or a dealer, at a price (the net asset value) worked out once a day after markets close.
ETFs (exchange-traded funds) trade on a stock exchange like a share, at prices that change through the day. You buy them through a brokerage account, which can be an RRSP or TFSA.

Both can hold the same kinds of investments, and both can sit in any registered account.

Index funds vs active funds

An index fund (most ETFs and some mutual funds) simply buys everything in a market index, such as a broad Canadian or world stock index. It does not try to pick winners, so it can charge very little.

An active fund pays managers to choose investments they think will beat the market. Some do in some years; the hard part is knowing in advance which ones will keep doing it once their higher fee is taken out. Whatever you choose, compare its returns with a suitable index (see how to evaluate a fund).

What you pay: MER and other costs

MER (management expense ratio): The fund's management fee plus operating costs, shown as a yearly percentage of your investment. It is taken out of the fund before returns are reported, so you never see a bill. MERs range from under 1% to over 3%.
Trailing commission: A yearly payment from the fund company to your advisor's firm for as long as you hold the fund. It is included in the MER and typically runs from 0.25% to 1.5% a year.
Trading expense ratio (TER): What the fund spends buying and selling its holdings, shown separately from the MER.
Sales charges: A front-end load is a fee when you buy (up to 5%, negotiable). A no-load fund charges nothing to buy or sell, but still has an MER.

Two rules that changed on June 1, 2022

Deferred sales charges (DSCs) are banned. DSC funds charged you a fee of up to 6% if you sold within roughly five to seven years. Since June 1, 2022, the DSC option is banned across Canada (Ontario adopted its own ban on the same date). Units bought earlier keep their old redemption schedule until it runs out.
No trailing commissions to discount brokers. Fund companies can no longer pay trailers to dealers that do not assess whether an investment suits you, such as order-execution-only (discount) brokers. If you invest on your own, you should be offered a fund series without a trailer.

Fund Facts and ETF Facts

Every mutual fund must publish a short Fund Facts document, and every ETF an ETF Facts. They use the same layout so you can compare funds side by side:

the 10 largest holdings and the mix by asset type, industry and country
a risk rating on a five-step scale from low to high, based on how much the fund's value has bounced around
year-by-year returns for up to 10 years, plus the best and worst three-month returns
the MER, trading expenses, trailing commission and any sales charges

Find them on the fund company's website. Always read them before you buy.

What a fee costs over 25 years

Take $10,000 invested for 25 years in investments that earn 6% a year before fees. To keep it simple, assume the fee is subtracted from the return each year and nothing else is added or withdrawn. Each year the balance is multiplied by 1 plus the net return.

$10,000 for 25 years at 6% gross
Yearly fee	Net return	Calculation	Value after 25 years
None	6.00%	$10,000 × 1.06, 25 times	$42,919
0.25% (low-cost index ETF)	5.75%	$10,000 × 1.0575, 25 times	$40,458
2.00% (high-fee fund)	4.00%	$10,000 × 1.04, 25 times	$26,658

The difference between the two funds is $13,800 ($40,458 − $26,658). The high-fee fund leaves you with about a third less money, even though its fee looks small each year. Of the $32,919 the investments earned in total, the 2% fee consumed about half.

Fees buy something – sometimes. A higher fee can include ongoing advice, a financial plan or help with behaviour in bad markets. That can be worth paying for. Just know the price, and ask what you get for it.

Questions to ask before buying

What is the MER, and how much of it is a trailing commission?
Is there a lower-cost series or a similar index fund or ETF?
Are there sales charges or fees to sell?
What index should I compare this fund with?