Actively vs. Passively Managed Fund Investments in Canada:
Which is Better for Your Portfolio?
Investing is one of the most powerful ways Canadians can grow their wealth, secure their retirement, and build long-term financial freedom. When it comes to choosing investment funds, two major approaches dominate the conversation: actively managed funds and passively managed funds. Both types of funds are widely available in Canada through banks, wealth management firms, and online brokerages.
But what exactly is the difference between the two? How do their rates of return, Management Expense Ratios (MERs), risks, and tax implications compare? And more importantly, which option is better suited for Canadian investors depending on their goals and risk tolerance?
In this article, we will explore the key differences between actively managed and passively managed funds in Canada, with real-world insights, examples, and professional guidance.
Understanding Actively Managed Funds in Canada
What are Actively Managed Funds?
An actively managed fund is a mutual fund or investment portfolio overseen by a professional fund manager (or team of managers). Their job is to actively make investment decisions: buying, selling, and reallocating assets to try and outperform a benchmark index such as the S&P/TSX Composite Index.
Characteristics of Actively Managed Funds
Professional expertise: A team of analysts and managers continuously evaluates companies, sectors, and economic conditions.
Flexibility: Fund managers can shift investments in response to market trends.
Goal: Beat the market benchmark by generating higher-than-average returns.
Examples in Canada
Segregated Funds Sold by Canadian Insurers
RBC Select Balanced Fund
TD Canadian Equity Fund
Mackenzie Canadian Growth Fund
These funds aim to outperform indexes such as the S&P/TSX or MSCI World Index through active stock selection.
Understanding Passively Managed Funds in Canada
What are Passively Managed Funds?
A passively managed fund, often structured as an ETF (Exchange-Traded Fund) or an index mutual fund, simply tracks the performance of a market index rather than trying to outperform it.
Characteristics of Passive Funds
Low cost: Since no team is actively researching or trading, fees are minimal.
Market-mirroring: The fund replicates the returns of an index (e.g., S&P 500, S&P/TSX Composite).
Simplicity: Investors don’t have to worry about stock-picking—it follows the index automatically.
Examples in Canada
Vanguard FTSE Canada All Cap Index ETF (VCN)
iShares S&P/TSX 60 Index ETF (XIU)
BMO S&P 500 Index ETF (ZSP)
These ETFs are favorites among Canadian investors for their low MERs and reliable tracking of index performance.
Rate of Return: Active vs Passive
Actively Managed Funds – Potential for Higher but Inconsistent Returns
Active managers attempt to beat the market by strategically selecting investments. Some years, they succeed and generate higher-than-average returns. However, research shows that most actively managed funds underperform their benchmarks over the long term—especially after accounting for fees.
In Canada, data from SPIVA (S&P Indices Versus Active) Reports consistently shows that:
Over 80% of Canadian actively managed equity funds underperform their benchmarks over 10 years.
Only a small fraction consistently outperform.
For example:
An actively managed Canadian equity fund may aim for an 8% annual return, but after high MERs and trading costs, investors may net closer to 6–6.5%.
Passively Managed Funds – Lower but More Predictable Returns
Passive funds don’t try to beat the market—they match it. Over long horizons, this approach has been shown to outperform the majority of active managers, simply because costs are lower and performance is tied directly to the index.
For example:
An S&P/TSX index ETF might deliver 7% annual returns (matching the market average), with negligible tracking error and low fees.
Conclusion on Returns
Short-term: Active funds can outperform, especially in volatile or niche markets.
Long-term: Passive funds generally deliver better net returns for most Canadian investors.
Management Expense Ratios (MERs) in Canada
What is MER?
The Management Expense Ratio (MER) is the annual fee charged by investment funds, expressed as a percentage of assets. It covers management salaries, research, administrative costs, and other expenses.
Active Fund MERs
Average MER for Canadian actively managed mutual funds: 1.5% – 2.5%
Some specialty funds may charge even higher.
Example: An actively managed equity fund with a 2% MER means if you invest $10,000, you pay $200 annually in fees, regardless of performance.
Passive Fund MERs
Average MER for Canadian index ETFs: 0.05% – 0.30%
Example: Vanguard’s VCN ETF has an MER of 0.06%, meaning a $10,000 investment only costs $6 annually.
Impact of MER Over Time
Fees dramatically affect long-term wealth growth.
$100,000 invested at 7% annual return over 30 years grows to $761,225 with a 0.1% MER.
The same investment with a 2% MER grows to $432,194.
That’s nearly $330,000 lost to fees—a major reason why passive investing has surged in popularity.
Risk Comparison
Actively Managed Funds
Pros: Managers can adjust portfolios during downturns, potentially reducing losses.
Cons: Risk of poor manager decisions; performance often depends on skill.
Passively Managed Funds
Pros: Broad diversification across entire markets reduces company-specific risks.
Cons: No protection during market crashes—if the market falls 20%, your ETF falls 20%.
Tax Implications in Canada
Active Funds: Higher turnover = frequent buying and selling, which triggers capital gains taxes. This makes them less tax-efficient in non-registered accounts.
Passive Funds: Low turnover = minimal realized capital gains, making them more tax-efficient for taxable accounts.
For RRSPs and TFSAs, the tax difference is less significant, but passive funds still save on MER costs.
Which is Better for Canadian Investors?
Active Funds Are Best For:
Investors who want professional guidance.
Those willing to pay higher fees for potential outperformance.
Specialized markets where active managers may add value (e.g., small-cap stocks, emerging markets).
Passive Funds Are Best For:
Investors who want low-cost, predictable returns.
Long-term retirement savers (RRSP, TFSA).
Anyone seeking broad diversification with minimal effort.
The Canadian Investment Landscape: Trends
Over the last decade, ETFs have exploded in popularity in Canada, with assets growing from under $50 billion in 2010 to over $400 billion in 2024.
Actively managed mutual funds still dominate in traditional banking channels, but fee-conscious millennials and Gen Z investors are increasingly shifting toward passive ETFs.
Robo-advisors like Wealthsimple Invest use ETFs exclusively to deliver low-cost, diversified portfolios.
Final Thoughts: Actively vs Passively Managed Funds in Canada
From a financial planner’s perspective, here’s the bottom line:
Passive investing through low-cost ETFs should be the core strategy for most Canadians, ensuring market-matching returns at minimal cost.
Actively managed funds may complement portfolios for investors willing to take on extra risk for potential outperformance, particularly in niche markets.
Always pay close attention to the MER—even a 1% difference can mean hundreds of thousands of dollars over your lifetime.
For retirement planning, passive ETFs in RRSPs and TFSAs are usually the most tax-efficient and cost-effective option.
The smartest approach may be a blend of both: use passive funds for your core holdings and selectively add actively managed funds if you find managers with a proven track record.