Reddit says index everything. Your bank advisor says active managers earn their fees. The truth is messier than either side admits — and Canada's market is different from the US in ways that matter.
S&P publishes the SPIVA Canada Scorecard twice a year. It tracks what percentage of actively managed Canadian mutual funds underperform their benchmark index after fees. This is the closest thing we have to a definitive answer on active vs passive.
The headline number: over 10 years, roughly 85–90% of Canadian equity mutual funds underperform the S&P/TSX Composite. That sounds like a slam dunk for indexing. But the category-level data tells a more nuanced story.
Percentage of active funds that underperformed their benchmark over 10 years. Data from SPIVA Canada.
| Category | % Underperforming (10yr) | % Underperforming (5yr) | Verdict |
|---|---|---|---|
| Canadian Equity | ~87% | ~80% | Index wins |
| U.S. Equity (CAD) | ~95% | ~92% | Index wins big |
| International Equity | ~88% | ~75% | Mostly index |
| Canadian Small/Mid Cap | ~65% | ~55% | Active has a shot |
| Canadian Bonds | ~82% | ~78% | Index wins |
| Canadian Dividend | ~70% | ~60% | Some active alpha |
The nuance nobody mentions: Canadian small/mid-cap is where active management has the strongest case. The S&P/TSX small-cap index is heavily weighted toward speculative mining and energy companies.
A decent active manager who avoids the garbage can add real value. The failure rate drops to ~55% over 5 years — meaning almost half of active small-cap managers beat the index.
For U.S. equity? Don't even try.
The S&P 500 is the most efficient market on Earth. 95% of Canadian funds tracking it underperform. Just buy VFV or ZSP.
In the US, the active vs passive debate is basically settled. Vanguard won.
Index everything. But Canada's investment market has structural differences that change the calculus:
The TSX is top-heavy and sector-concentrated. Banks and energy make up ~50% of the S&P/TSX Composite. If you index the TSX, you're making a massive bet on Canadian financials and oil.
Active managers who underweight energy in downturns or avoid troubled bank stocks have room to outperform. This doesn't exist in the US — the S&P 500 is diversified across 11 sectors.
Small-cap coverage is thin. Analyst coverage on Canadian small-caps is sparse compared to the US. Fewer eyes on a stock means more mispricing.
Active managers with genuine research capability can exploit this. On the TSX Venture Exchange, it's even more pronounced.
The fee gap is wider in Canada. Canadian mutual fund MERs average 1.5–2.5%, while US actively managed funds average 0.5–1.0%.
Even when a Canadian active manager generates alpha, the higher fees eat most of it. If Canadian active fund fees dropped to US levels, the SPIVA numbers would look better for active management.
Translation: It's not that Canadian active managers are bad at picking stocks. Many aren't.
The problem is that 2%+ MERs create a massive hurdle. An active manager generating 1.5% annual alpha still leaves you with less than a 0.20% index fund after you pay their 2.10% MER.
A short list of Canadian active mutual funds with strong long-term track records. All in Series F (fee-based) MERs for fairer comparison.
| Fund | Category | MER (Series F) | 10-Year Return | Benchmark Return | Alpha |
|---|---|---|---|---|---|
| Mawer International Equity | International | 0.95% | 10.2% | 7.8% (MSCI EAFE) | +2.4% |
| Fidelity Canadian Growth Company | Canadian Equity | 1.05% | 9.8% | 7.4% (TSX) | +2.4% |
| Dynamic Power American Growth | U.S. Equity | 1.25% | 12.1% | 13.5% (S&P 500 CAD) | -1.4% |
| Mawer Canadian Equity | Canadian Equity | 0.80% | 9.1% | 7.4% (TSX) | +1.7% |
| Capital Group Canadian Focused Equity | Canadian Equity | 0.88% | 9.5% | 7.4% (TSX) | +2.1% |
Huge caveat: These are Series F MERs (fee-based advisor accounts). In Series A — what most bank clients own — add 0.75–1.25% to those MERs. Dynamic Power American Growth in Series A charges 2.48%, completely erasing any outperformance.
If you're going active, know your fund series. The same fund in Series A vs Series F can be the difference between beating and trailing the index.
Canadian small/mid-cap equities. The index is full of speculative resource stocks.
A good active manager who avoids the duds can genuinely add value. Mawer New Canada and Fidelity Small Cap Canada have strong track records here.
When you have access to Series F or O. If you work with a fee-only advisor or have an institutional plan with Series O pricing (0.01–0.05% MER), the fee hurdle drops dramatically. At Series O fees, many active funds look competitive.
Sector-specific Canadian exposure. If you want concentrated Canadian bank or resource exposure, active management can make sense. But most people are better off with sector ETFs like ZEB (banks, 0.28% MER) or XEG (energy, 0.61% MER).
U.S. large-cap equity. 95% of active funds underperform the S&P 500.
Buy VFV, ZSP, or TDB902 (TD U.S. Index Fund) and move on.
Canadian bonds. Bond markets are efficient enough that active bond fund managers rarely justify their fees. ZAG at 0.09% MER beats most active bond funds over any 10-year period.
Broad Canadian equity. For core TSX exposure, index funds win over 10+ years roughly 87% of the time. XIU (0.18% MER) or ZCN (0.06% MER) are hard to beat.
Index your core, consider active at the margins. Build your portfolio foundation with low-cost index funds or all-in-one ETFs (XBAL, VGRO, ZBAL). If you want to add active management, limit it to Canadian small-cap or international equity — the categories where active managers have the best odds.
Never pay 2%+ MER for active management in any category. If you can't access Series F (which requires a fee-based advisor), you're almost certainly better off indexing everything.
And be honest with yourself: are you picking an active fund because you've done the research, or because your bank advisor recommended it? Those are very different decisions.
Cost breakdown on $200K over 25 years:
Index fund at 0.20% MER → you pay ~$22,000 in total fees
Active fund at 2.10% MER → you pay ~$195,000 in total fees
That active manager needs to outperform the index by 1.9% every single year just to break even. Over 25 years, barely any do. Run the numbers yourself with our fee calculator.
Run the numbers. See exactly how much your active fund fees cost over your investing lifetime.
Fee Impact Calculator Low-Fee AlternativesNothing on this site is financial advice. SPIVA data is approximate and changes with each semi-annual report. Fund returns and MERs can change — verify current data before investing.
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