As exchange-traded funds grow in popularity thanks to their low cost and ease of buying and selling, more fund companies are coming out with ETFs that are spinoffs of existing funds, known as ETF series. An ETF series is essentially an exchange-traded version of a traditional mutual fund’s portfolio.
As of the end of 2024, 243 funds in Canada were considered ETF series, according to TD Securities. Those ETF series held $25.7 billion in assets under management—roughly 5% of the total Canadian ETF market. Of those, 50 were launched in 2024 and 47 in 2023. In contrast, 15 ETF series offerings came to market in 2020.
While this is still a small portion of the market, the growth of such offerings reflects stepped-up investor interest in ETFs more broadly. Their popularity is especially growing among fund companies looking to bring ETF versions of actively managed funds with strong track records to the market. “Given the appetite for ETFs, if you have a successful mutual fund, it makes more sense to launch an ETF series,” says Lan Ahn Tran, manager research analyst at Morningstar.
What Is an ETF Series?
On the surface, an ETF series is like any other ETF. Unlike a traditional mutual fund, an ETF trades on an exchange and can be bought and sold like a stock throughout the day. With an ETF series, however, investor money is pooled in the same portfolio as a traditional mutual fund.
The fees charged to investors in ETF series are generally comparable to those of the F series for many mutual funds, which are designed for fee-based accounts offered by advisors and don’t carry trailing commissions (such as on A-class funds), which significantly reduce investor returns. Instead, investors are charged any relevant commission when buying or selling the ETF through their brokerage account.
A Tilt Toward Active Management
To date, 21 ETF companies have issued ETF series. Purpose Investments and BMO Asset Management lead the way, with respective shares of 30% and 20% in the space. Evolve ETFs and Pimco follow with shares of 14% and 12%.
While ETFs have traditionally tracked indexes, many new ETF series are for actively managed strategies. Take BMO Global Asset Management. “The 22 series we offer are actively managed, and that’s the case with most providers,” explains BMO director of ETF distribution Erika Toth. She adds that some strategies can be a collection of ETFs, each tracking a specific index or obeying an automated management algorithm.
Tran says this partly reflects the market dynamics, wherein the real estate for passive ETFs has largely already been claimed: “There’s not a lot of market share to be gained.”
TD highlights other advantages of ETF series. A series lets fund managers carry out larger transactions, which reduces fixed costs like auditing, accounting, and regulatory filing fees.
On the investor side, since the mutual fund versions of many series predate their ETF units, their historical performance may let investors make more informed decisions. Consider Evolve ETFs, which was founded as an ETF provider but offers many strategies in a series structure that includes mutual funds. “Each corresponds to the needs of different investors. I have customers who don’t want to buy ETFs, only mutual funds, and vice versa,” says Evolve ETS chief investment officer Elliot Johnson.
In addition, the investor base has broadened, as many Canadians are investing through firms that were part of the Mutual Fund Dealers Association of Canada—now integrated into a self-regulatory organization known as the Canadian Investment Regulatory Organization—which previously provided investors access to ETFs.
Perhaps most importantly, some fund companies are simply playing defense. Given that mutual funds are increasingly losing assets to ETFs, “we expect the trend of launching ETF series to continue,” says TD Securities.
How Do Returns on ETF Series Compare?
Toth says that “peformance should be very similar” between ETF series and mutual funds. There may be slight differences between returns on the two types of funds, due to the impact of the ETF bid/ask spread (the difference between what an investor would pay to buy shares and the price where they can be sold) and the mutual fund’s transaction expense ratio.
Fees constitute the biggest factor determining relative performance between different series. These fees highlight the cost to investors of mutual funds that incorporate fees to pay advisors sales ongoing commissions after the fund has already been purchased.
A look at three ETF Series from Evolve, Purpose, and BMO shows how the mutual fund series F and the ETF versions closely track each other. The Evolve Enhanced Yield Bond fund’s one-year performance is 4.49% for the mutual fund version and 4.47% for the ETF version.
The BMO SIA Focused Canadian Equity ETF and the F series mutual fund both carry an MER of 0.83% and have returns that vary by only 1 basis point for the last one-, three-, and five-year periods. However, series A of the BMO fund lags the lower-cost series by 1.28% for one year, and by more than 1 percentage point per year for the other two periods.
It’s a similar story for Purpose Credit Opportunities Series A, which charges investors 2.12% of their money, the series F with an MER of 1.0%, and the ETF series with a 0.98% fee. Investors in the Series A version have seen a return of 12.76% over the last year, but the ETF Series and Series F investors have pocketed returns north of 13%.
“Those with different trailing returns have different fees, and the magnitude of fee differences line up with the magnitude of return differences,” says Tran.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
