In my years of analyzing investment landscapes across borders, I have found the Canadian market to be a fascinating case study in contrasts. It boasts a sophisticated financial system and globally recognized companies, yet its investment vehicle of choice for millions—the mutual fund—often tells a story of mediocrity. When clients ask me about “average” performance, I tell them that average is not a number; it is an outcome. It is the final result of a complex equation involving fees, market behavior, and investor psychology. In this article, I will dissect the performance of the average Canadian mutual fund. We will move beyond the headline numbers to understand the forces that create them, compare them to passive alternatives, and ultimately, determine what “average” truly means for your financial health.
Table of Contents
Defining “Average”: It’s More Than Just a Number
The term “average Canadian mutual fund performance” is deceptively simple. We must define our terms carefully. Are we talking about the average equity fund? The average fixed-income fund? The average across all categories? Performance is also measured against a benchmark. A 5% return is meaningless unless we know if the relevant market index returned 3% or 7%.
For this analysis, I will focus on Canadian equity funds, as they are a core holding for many investors and their performance is most frequently discussed. The benchmark for this category is almost always the S&P/TSX Composite Index, the broad measure of the Canadian stock market.
The Hard Data: What Does the Average Actually Look Like?
Multiple studies from firms like Morningstar, S&P Dow Jones Indices (through their SPIVA reports), and the Canadian Investment Funds Standards Committee (CIFSC) consistently reveal a sobering pattern: the majority of actively managed Canadian mutual funds underperform their benchmark index over the long term.
Let’s construct a realistic scenario based on this data. Assume the S&P/TSX Composite Index delivers an average annual return of 7.0% over a 10-year period before fees.
The average Canadian equity mutual fund, according to data from Morningstar, often has a Management Expense Ratio (MER) hovering between 1.80% and 2.20%. This is significantly higher than the average for U.S. funds, a critical point we will return to.
Let’s use a conservative MER of 2.00% for our average fund.
Therefore, the net return for the average investor would be:
\text{Net Return} = \text{Gross Return} - \text{MER} = 7.0\% - 2.00\% = 5.0\%But this is too generous to the active fund. The SPIVA reports consistently show that a significant percentage of funds also underperform their benchmark before fees are deducted. This is the active management drag.
A more realistic calculation might look like this:
- Benchmark Return (S&P/TSX): 7.0%
- Average Fund Gross Return (Pre-Fee): 6.8% (a 0.2% underperformance due to trading costs and imperfect stock selection)
- Average MER: 2.00%
- Average Fund Net Return (Investor’s Reality): 6.8\% - 2.00\% = 4.8\%
This 4.8% is a more plausible “average” net performance for an actively managed Canadian equity fund in this scenario.
Now, let’s compare this to a low-cost Index ETF that tracks the S&P/TSX, such as the iShares S&P/TSX Capped Composite Index ETF (XIC). Its MER is approximately 0.06%.
The investor in this ETF would capture nearly the full benchmark return:
\text{Net Return} = 7.0\% - 0.06\% = 6.94\%The Performance Gap: A Long-Term Calculation
The difference between 4.8% and 6.94% seems small on an annual basis. But compounded over time, it becomes a chasm of lost wealth.
Assume an initial investment of \$100,000 over 25 years.
Scenario A: Average Active Mutual Fund
Net Return = 4.8%
Scenario B: Low-Cost Index ETF
Net Return = 6.94%
The Difference:
\$536,700 - \$321,600 = \$215,100The investor in the average-priced mutual fund would have over $215,000 less for the same initial investment. This devastating difference is the true cost of “average” performance. It is not just underperformance; it is a massive transfer of wealth from the investor to the fund company in the form of fees.
Why is the “Average” So Low? The Canadian Fee Problem
The core reason for this chronic underperformance is the high cost of investing in Canada. The average Canadian equity fund MER of ~2.00% is a massive headwind that active managers must overcome just to break even with the index. Beating it by more than 2% annually, consistently, is a feat very few managers achieve.
This high-cost environment is sustained by several uniquely Canadian factors:
- Market Concentration: The S&P/TSX is heavily weighted towards just three sectors: financials, energy, and materials. This lack of diversification can make it difficult for active managers to add value through stock selection, as their choices are limited within a narrow field.
- Distribution Channels: A large portion of mutual funds in Canada are sold through advisors who are compensated via embedded trailing commissions from the fund’s MER. This system incentivizes the sale of higher-fee products and reduces competitive pressure on fees.
- Investor Behavior: Many Canadian investors are not sufficiently fee-sensitive. They may prioritize the relationship with their advisor or be unaware of the long-term impact of fees, allowing the high-cost model to persist.
A Comparative Table: Average Active vs. Passive
| Metric | Average Canadian Equity Mutual Fund | Low-Cost Canadian Index ETF |
|---|---|---|
| Management Expense Ratio (MER) | ~2.00% | ~0.06% – 0.20% |
| Primary Goal | Outperform the S&P/TSX Composite Index (Alpha) | Match the performance of the S&P/TSX Composite Index |
| Typical Performance (Net of Fees) | Chronic Underperformance | Matches index performance, minus the tiny fee |
| Probability of Outperformance | Low (SPIVA reports show >80% often underperform over 10y) | 100% (relative to the index, minus fee) |
| Tax Efficiency | Generally lower (due to higher turnover generating distributions) | Generally higher (lower turnover) |
| Investor’s Role | Rely on fund manager’s skill | Remain disciplined through market cycles |
Beyond Averages: The Survivorship Bias Trap
When looking at performance data, you must be aware of survivorship bias. This is the logical error of focusing only on funds that currently exist and ignoring those that have been closed or merged away due to poor performance.
Fund companies routinely bury their mistakes. A poorly performing fund is often merged into a more successful one, erasing its terrible historical record from today’s databases. This makes the published “average” performance of the surviving funds look better than it actually was for an investor who chose from the entire universe of funds years ago. The true average, including the corpses of failed funds, is even lower than the reported figures.
What Should a Canadian Investor Do?
Knowing that the average fund is likely to disappoint, your strategy should be deliberate.
- Emote Low-Cost Indexing: For the core of your portfolio, a low-cost ETF tracking the S&P/TSX, U.S. equity (e.g., S&P 500), and global equity markets is the most reliable way to capture market returns and keep fees from devouring your compound growth.
- If Using Active Funds, Be Highly Selective: If you choose to pursue active management, you must be rigorous. Look for funds with:
- Lower-than-average MERs: Find managers who align their interests with yours by keeping costs low.
- Long-Term Proven Performance: Look for a 10+ year track record of beating the index after fees.
- A Consistent Philosophy: Choose a fund with a clear, disciplined strategy that hasn’t changed with every market trend.
- Understand How Your Advisor is Paid: If you work with an advisor, ask if they are compensated through trailing commissions from fund MERs. Consider fee-only advisors who charge a flat rate and are therefore incentivized to use the lowest-cost products to maximize your return.
Conclusion: Rejecting Average
The performance of the average Canadian mutual fund is not a benchmark to aspire to; it is a warning to avoid. It is the result of a high-fee ecosystem that systematically disadvantages the individual investor. Average, in this context, means accepting a significant and guaranteed erosion of your lifetime wealth.
Your goal should not be to find an “above-average” active fund—though a few may exist—but to reject the entire high-cost model altogether. By embracing a low-cost, passive investing strategy, you are not settling for average. You are making a conscious decision to sidestep the high probability of underperformance and ensure that your portfolio’s returns are determined by the market’s growth, not drained by fees. In the Canadian market, this is not just a strategy; it is an act of financial self-defense.
