ETFs are outpacing mutual funds despite market volatility. Are rookie retail investors at risk?

Jenna Benchetrit · CBC News

· Posted: Jun 02, 2025 4:00 AM EDT | Last Updated: 2 hours ago

Canadian investors are putting much of their wealth into exchange-traded funds (ETFs), according to caller data, adjacent arsenic the U.S.-led commercialized warfare rocks planetary banal markets, and immoderate experts accidental rookie retail investors could be at higher risk. 

Net income of exchange-traded funds — a basket of stocks that tin beryllium bought and sold with ease throughout the trading day — are outpacing those of communal funds successful Canada, particularly among retail investors, according to a CIBC study published earlier this month. 

Mutual funds, which are investment products that person much embedded fees and less taxation advantages, inactive marque up a larger information of Canadian concern portfolios. They're usually actively managed by a professional and are exposed to less intraday marketplace swings due to the fact that they're traded erstwhile per time aft marketplace close.

ETFs have grown astatine 3 times the complaint of their older cousins successful the past 5 years, signalling a displacement successful however some retail investors and professionals are approaching their concern strategies. Sales for some dropped dramatically successful 2022, at the onset of the ostentation crisis.

"People person been disappointed with [mutual fund] show for a agelong time, and historically, astir radical person had much investments successful communal funds than successful ETFs," said Dan Hallett, a Windsor, Ont.,-based vice-president of probe for Highview Financial Group.

"More radical are paying attraction to the costs that are embedded successful their investments and the ETF operation is mostly a lower-cost conveyance than a communal fund, peculiarly connected the retail side," helium said. "But it's besides happening astatine the advisory level."

In fact, ETF assets (the worth of each the equities and currency held successful the funds) reached an all-time precocious of $518 cardinal successful 2024, a study from the Investment Funds Institute of Canada shows. Those assets have ballooned by astir 7 times successful the past decade.

Retail investors are contributing heavy to that growth, some reports say, arsenic much radical opt to instrumentality their investments into their ain hands rather than wage a nonrecreational fiscal advisor the fees to negociate their portfolios.

But determination are concerns astir risk. South Korea, disquieted astir rookie retail investors who are buying exchange-traded products (including ETFs) by leveraging debt, has introduced a one-hour mandated grooming for those who negociate their ain investments.

Impact connected capitalist outcomes

In the U.S., concern absorption institution Vanguard's VOO has go 1 of the world's best-selling ETFs by bundling stocks from the S&P 500 index, with the extremity of tracking the index's return.

The company's ain hazard scale, which measures the likelihood of losing wealth connected an investment, puts the VOO at a hazard level of 4 retired of five, for products that are "broadly diversified but are taxable to wide fluctuations successful stock prices." It recommends it for semipermanent concern strategies.

Sal D'Angelo, the caput of merchandise astatine Vanguard Canada, says determination are a fewer reasons wherefore ETF uptake has grown substantially successful the past respective years.

Both retail investors and nonrecreational portfolio managers are moving to lower-cost options; There's much involvement successful indexing, which is simply a passive concern strategy that matches an index's best-performing stocks, alternatively than trying to bushed the index's growth; and determination are much retail investors buying ETFs successful general.

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Vanguard Canada's mentation of the S&P 500 ETF is listed connected the Toronto Stock Exchange nether the VFV ticker. It boasted an yearly instrumentality of 35.24 per cent past year and 23.3 per cent successful 2023. This year, successful the aftermath of a tariff-induced roller-coaster marketplace environment, the ETF is showing a year-to-date nonaccomplishment of -3.07 per cent.

D'Angelo argues that ETFs work good successful these conditions due to the fact that of their flexibility. "ETFs arsenic a vehicle, I think, enactment truly good successful volatile markets due to the fact that they person that contiguous liquidity if you bash privation to trade," helium said. 

Others accidental that the influx of investors buying ETFs under volatile marketplace conditions poses immoderate concerns.

"It's concerning to maine successful presumption of the impact connected capitalist outcomes," said Hallett. He thinks the aforesaid factors that near immoderate investors disappointed successful communal funds could yet afflict ETFs, too.

"When you person investors that are trying to physique a portfolio and they're bombarded with astir a dizzying array of choices, lone the astir disciplined and knowledgeable investors volition payment from that and tin easy sift done it," helium said.

"Everybody other is going to get precise distracted," Hallett said, "and that's wherever you extremity up with a disappointing performance."

Massive leap successful April

The information comes arsenic a caller procreation of investors person game-ified day trading, buying and merchantability stocks astatine the driblet of a chapeau from their phones and tablets.

Automated tools — which fto investors acceptable trading parameters that are past executed by a bot, similar selling a banal erstwhile it hits a definite price — are besides seeing much predominant use.

Tradeweb, a institution which operates marketplaces for traders, saw an 83 per cent leap successful the fig of retail investors utilizing automated tools to marque trades successful April compared to the aforesaid period a twelvemonth earlier. 

"Something we haven't seen truthful prolifically successful erstwhile periods of marketplace volatility is an summation successful clients turning to automation," wrote Adam Gould, the planetary caput of equities astatine Tradeweb.

"However, successful April, we saw investors utilizing automated tools [to] heighten reactivity to a challenging trading scenery with greater velocity of execution."

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Marius Zoican, an subordinate prof of concern astatine the University of Calgary, studies the gameification of investing and monitors retail capitalist behaviour.

"If the marketplace goes up five per cent within a time oregon drops five per cent intraday, and if you are holding ETFs and you are receiving these notifications, it's precise tempting to enactment connected them, even though those are astir past performance," helium said.

"Once you're benignant of nudged … into this thought that the marketplace is going down, you're apt to conscionable spell connected your telephone and and sell. And that's perhaps not [the] optimal behaviour."

He added that during highly volatile times, similar the play we're presently in, ETFs tin look a liquidity unreserved if excessively galore radical effort to merchantability astatine the aforesaid time.

"That mightiness create a divergence between the terms of the ETF and the terms of the underlying basket," helium explained, whereas communal funds managed by a nonrecreational person much guardrails against impulsive concern behaviour.

"When there's a batch of volatility, determination are ever further risks for retail [investors], for tiny investors who may enactment impulsively."