Investment Vehicles
Beyond individual stocks and bonds, businesses and investors have access to pooled and derivative investment instruments. The four main alternatives covered in ADMN 201 are mutual funds, exchange-traded funds (ETFs), hedge funds, and commodities.
How It Appears Per Course
ADMN 201
These are presented as investment opportunities that financial managers must understand. Each carries different risk, cost, and liquidity profiles.
graph TD A[Investment Vehicles] --> B[Mutual Funds] A --> C[ETFs] A --> D[Hedge Funds] A --> E[Commodities / Futures] B --> B1[Pooled portfolios\nActively managed\nLoad vs No-load] C --> C1[Index-tracking\nPassively managed\nLow cost] D --> D1[Private pools\nAccredited investors\nHigh risk / high return] E --> E1[Physical goods\nFutures contracts\nMargin trading]
(diagram saved)
Mutual Funds
A mutual fund pools investments from many individuals and firms to purchase a diversified portfolio of stocks, bonds, and/or short-term securities.
How ownership works: If you invest 100,000 portfolio, you own 1% of the portfolio.
Cost Structures
| Type | Commission |
|---|---|
| Load fund | Charges 2–8% commission when you buy in or sell out |
| No-load fund | No sales commission when you buy or sell |
Annual management fees for mutual funds average ~1.4% of assets.
Styles of Mutual Fund
| Style | Focus |
|---|---|
| Safety / income | Invests in Treasury bills, government bonds; prioritizes capital preservation |
| Current income | Higher income, accepts some risk |
| Growth | Seeks long-term appreciation; accepts more volatility |
| Aggressive growth | Maximum capital gains; invests in high-risk new companies |
| Socially responsible | Avoids cigarette manufacturers, weapons makers; focuses on environment, human rights, fair labour |
The Problem with Mutual Funds
Research shows most actively managed mutual funds do not beat the market:
- Only 1 in 3 Canadian mutual funds beat the S&P/TSX index over the past 3 years
- In the US, only 1 in 70 mutual funds beat the S&P 500 over 3 years
This is driven by high management fees + poor stock selection. As a result, many investors have shifted to ETFs.
Despite this, mutual funds still represent 36% of Canada’s $4.5 trillion in financial wealth.
Exchange-Traded Funds (ETFs)
An ETF is a bundle of stocks (or bonds) that tracks an index and trades like a stock on an exchange throughout the day.
ETF vs Mutual Fund Comparison
| Feature | Mutual Fund | ETF |
|---|---|---|
| Management | Active (fund manager picks stocks) | Passive (rules-based, tracks index) |
| Pricing | Priced once per day at close | Trades continuously during market hours |
| Annual fees | ~1.4% of assets | As low as 0.04% |
| Goal | Beat the market | Match the market |
| Flexibility | Buy/sell at end of day | Buy/sell any time during trading |
Because ETF rules are set in advance (what stocks to include, when to rebalance), no active stock-picking is needed — this dramatically reduces costs.
ETF Variety
- Gold ETFs, green/ESG ETFs, gender-equity ETFs
- In 2021, Purpose Financial LP launched Canada’s first Bitcoin ETF (BTCC), which was immediately popular and brought many new investors into the space
Hedge Funds
A hedge fund is a private pool of money managed to try to give investors a positive return regardless of stock market performance.
Key characteristics:
- Available only to accredited (wealthy/sophisticated) investors
- Not subject to the same regulations as mutual funds
- Use aggressive strategies: short selling, leverage, derivatives, arbitrage
- Goal: absolute return (positive in any market condition)
- High risk + potentially high reward
- Example relevance: hedge funds were short-selling GameStop in 2021 and were caught in the meme-stock short squeeze, losing billions
Commodities and Futures
Commodities are physical goods — oil, wheat, corn, coffee, gold, silver — traded in the commodities market.
Futures contracts: Agreements to buy specified amounts of a commodity at a given price on a preset date. A firm might use futures to lock in a price for raw materials it will need months from now.
Key features of commodities trading:
- Traders often buy on margin (put up only a percentage of the contract value)
- Margin in commodities = highly leveraged → small price moves produce large gains or losses
- Commodity prices can be very volatile (weather, geopolitics, supply chain disruptions all matter)
Why businesses use futures:
- Hedging: Lock in a price for an input you need, eliminating price uncertainty
- Example: An airline buys oil futures to lock in fuel prices, protecting against price spikes
Key Points for Exam/Study
- Mutual fund = pooled, actively managed, higher fees; most fail to beat their index
- ETF = passively managed, index-tracking, traded during the day, fees as low as 0.04%
- Hedge fund = private, accredited investors only, aims for positive return in any market
- Commodities/futures = physical goods; futures contracts lock in a price; often traded on margin
- Load fund = commission (2–8%); No-load = no commission
- ETF fees vs mutual fund fees: ~0.04% vs ~1.4% — a 35x difference
- Most mutual funds don’t beat the market; this is why ETFs are growing
- Futures = agreement to buy a specific amount at a specific price on a specific date
- Commodities trading is typically on margin → amplified risk
Cross-Course Connections
SecuritiesMarkets — ETFs and mutual funds trade in secondary markets
RiskManagement — investment vehicles carry speculative risk; hedge funds and commodities especially
LongTermFinancing — individual stocks and bonds are the building blocks of these vehicles
Open Questions
- What is the difference between a hedge fund and a private equity fund?
- Are socially responsible mutual funds financially competitive with standard funds?
Cross-course: SelectionBias-SecuritiesMarkets — how survivorship bias in mutual fund and hedge fund track records misleads investors