Segregated Funds vs Mutual Funds vs ETFs: A Plain-Language Guide

Meet the three

Mutual funds are offered by investment fund companies and sold through securities-registered dealers. You buy and sell units at a price that's calculated once a day, after the markets close. Many people like them because it's easy to set up automatic monthly contributions.

ETFs (exchange-traded funds) also hold a basket of investments, but they trade on a stock exchange, just like a stock. Their price moves throughout the trading day, and you usually buy them through an investment dealer or an online trading platform. Many ETFs simply track a market index, which is one reason their ongoing fees are often lower.

Segregated funds ("seg funds") look a lot like mutual funds on the inside, but they're offered by life insurance companies as an insurance contract. That insurance wrapper adds some features you won't find in the other two, like guarantees on maturity and death benefits, subject to conditions such as holding periods (withdrawals reduce guarantees). They're sold by licensed life insurance agents.

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The side-by-side

Segregated funds

Who offers it: Life insurance companies (an insurance contract)
Who sells it: Licensed life insurance agents
Who regulates the sale (Ontario): FSRA (provincial insurance regulator)
Maturity and death benefit guarantees: Typically 75% to 100% of what you put in, subject to conditions such as holding periods (often 10+ years); withdrawals reduce guarantees
Creditor protection: Potential protection, depending on the beneficiary named and provincial law; never assured
Bypassing probate: With a named beneficiary, the death benefit is paid directly to them, outside the estate, in registered or non-registered contracts
Fees: Usually higher, because you're also paying for the insurance guarantees
Getting your money out: Can usually withdraw, but withdrawals reduce guarantees and may carry fees under the contract
TFSA, RRSP, RRIF: Yes, can be held in all three

Mutual funds

Who offers it: Investment fund companies
Who sells it: Securities-registered dealers and representatives
Who regulates the sale (Ontario): Ontario Securities Commission; dealers overseen by CIRO
Maturity and death benefit guarantees: None
Creditor protection: No insurance-based protection (some limited protection may apply to RRSPs/RRIFs in bankruptcy)
Bypassing probate: Non-registered: usually goes through the estate. Registered plans: in Ontario you can usually name a beneficiary
Fees: Ongoing management expense ratio (MER)
Getting your money out: Usually sold at the end-of-day price
TFSA, RRSP, RRIF: Yes, can be held in all three

ETFs

Who offers it: Investment fund companies; traded on a stock exchange
Who sells it: Investment dealers and online trading platforms
Who regulates the sale (Ontario): Ontario Securities Commission; dealers overseen by CIRO
Maturity and death benefit guarantees: None
Creditor protection: No insurance-based protection (same limited RRSP/RRIF note)
Bypassing probate: Same as mutual funds
Fees: Usually lower MERs, plus possible trading commissions and bid-ask spreads
Getting your money out: Can be sold any time the exchange is open, at the market price
TFSA, RRSP, RRIF: Yes, can be held in all three

Segregated fund values can go up or down. A guarantee only kicks in on the maturity date or at death. Before then, the market value moves just like any other investment.

A closer look at the seg fund "extras"

The guarantees. You'll often see seg funds described as "75/75," "75/100" or "100/100." The first number is the minimum percentage of your deposits returned at the maturity date, and the second is the minimum at death. If you take money out early, those guarantee amounts go down.

Your beneficiary. Because a seg fund is an insurance contract, you can name a beneficiary who receives the death benefit directly. That can mean a quicker, more private transfer that skips probate.

Potential creditor protection. In some situations, such as when certain family members are named as beneficiaries, a seg fund contract may be protected from creditors. It depends on provincial law and the facts, and it's never assured. A lawyer is the right person to confirm your situation.

If an insurer fails. Every life and health insurance company authorized to sell insurance in Canada is a member of Assuris. Assuris is the not for profit organization that protects Canadian policyholders in the unlikely event that their life and health insurance company fails. Details about Assuris protection are available at www.assuris.ca.

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Who might consider each?

There's no one right answer here. It depends on your goals, timeline and comfort with ups and downs. In general terms:

Seg funds may appeal to people who value guarantees, want a smooth way to pass money to a named beneficiary, or like the idea of potential creditor protection, and are comfortable paying higher fees for those features.
Mutual funds may appeal to people who want professional management and simple automatic contributions, without insurance features.
ETFs may appeal to people who are comfortable buying and selling on an exchange and who put a high priority on lower ongoing fees.

Plenty of people use more than one. Your TFSA, RRSP and RRIF are just the "containers," and each of these can sit inside them.

A quick note about us

Barrhaven Financial Services Inc. is a licensed life and health insurance agency. We can talk with you about insurance-based options, like segregated funds and annuities, for your TFSA, RRSP or RRIF. We don't sell or give advice on mutual funds or ETFs. For those, please speak with a securities-registered representative.

Segregated Funds vs Mutual Funds vs ETFs: What's the Difference?