Why Canadian Investors Are Turning to Active ETFs

Exchange-traded funds have long been the go-to choice for investors who want a low-cost, passive way to track broad benchmarks such as the S&P 500, while mutual funds have traditionally been favored by investors seeking active, hands-on portfolio management.

Now, active ETFs—funds where managers try to outperform an index through stock selection and strategic positioning—are blending the best traits of both structures and gaining rapid popularity among Canadian investors.

The market is responding quickly. So far this year, 71% of newly launched ETFs in Canada have been actively managed—the highest proportion on record—and active strategies have captured roughly 30% of total industry flows, according to Bloomberg Intelligence.

This growing interest has drawn established asset managers into the space. In October, Capital Group introduced its first active ETFs in Canada, and J.P. Morgan launched its inaugural retail-focused active ETFs for Canadian investors. “The industry is at an inflection point,” said Travis Hughes, head of Canada at J.P. Morgan Asset Management. “We are still in the early stages of this transition and eager to contribute to its development.”

ETFs offer lower fees, transparency and tax benefits

Active ETFs have surged as investors increasingly move away from higher-cost mutual funds. While both ETFs and mutual funds pool investors’ capital to buy a diversified mix of stocks, bonds and other assets, the operational structure of mutual funds tends to be more expensive to run.

That cost differential has made it easier for institutional managers like J.P. Morgan—previously focused on large institutional clients—to expand into products tailored for financial advisers and retail investors. “Mutual funds require a separate fund account and incur additional operational costs; ETFs simplify that process,” Hughes explained.

Cost is often the decisive factor. Bloomberg reports average management expense ratios for active ETFs around 0.53%, while many mutual funds still carry fees above 1%. Beyond fees, ETFs provide clear portfolio transparency, intraday tradability on exchanges, and potential tax efficiencies. Because most ETF transactions occur on the secondary market, there is generally less forced selling within the fund, which can reduce the frequency and size of capital gains distributions to investors.

ETFs are driving net inflows and reshaping the industry

The cumulative effect is significant: ETFs of all kinds attracted $33 billion in new assets in the first half of the year, while mutual funds experienced about $8 billion in outflows, according to a TD Securities report. The shift is broadening beyond Canada—MFS Investment Management, the firm credited with creating the modern mutual fund a century ago, announced plans to introduce active ETFs in the U.S.

That said, passive ETFs remain the lowest-cost option. Some index-tracking funds charge fees as low as about 0.05%, making it difficult for even skilled active managers to consistently beat the market, particularly after fees are taken into account. “It is very difficult to consistently provide alpha versus the market,” Hughes acknowledged. “But for investors and advisers who do the research and identify active managers capable of delivering outperformance, active ETFs can be a powerful addition to a portfolio.”

Active management can help limit downside and add income

One of the primary reasons investors consider active ETFs is downside protection. Jean-René Ouellet, an investment specialist at Desjardins Group, points out that the market’s recent gains have been concentrated in a handful of mega-cap technology stocks—so-called Magnificent Seven names such as Nvidia and Apple—and that reliance on market-cap-weighted indexes can heighten concentration risk.

Adopting a different approach—switching to an active mandate or a strategy like an equal-weighted S&P 500 ETF—can reduce that concentration. Equal-weighted funds assign the same weight to every company in the index and require active rebalancing, which can dampen the impact of a single sector or top-heavy stock on portfolio returns.

Active ETFs also have flexibility to use additional tools, such as options overlays, to generate income or cushion losses in volatile markets. Many active funds aim both to protect capital and to produce a steady income stream. “You’re not suffering as much as the market does; that’s essentially the intended advantage of an actively managed portfolio,” said Xin Lou, a financial planner at Coast Capital.

Choosing the right active ETF comes down to matching an investor’s objectives and risk tolerance with a fund’s strategy. That alignment helps investors stay the course through market cycles and benefit from long-term compounding. “Long-term compounding is what will help you reach your goals,” Lou added. “Make sure you’re in a strategy you understand and can stick with, so you won’t abandon it at the first sign of trouble.”

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