Segregated Funds in Canada: Are They Just Actively Managed Mutual Funds with Insurance Benefits?
Discover how segregated funds work, their advantages, fees, and how they compare to mutual funds and ETFs for Canadian investors.
What Are Segregated Funds?
Segregated funds (often called “seg funds”) are investment products offered exclusively by insurance companies in Canada. They are similar to mutual funds because they pool money from many investors and are professionally managed.
However, they also include insurance features, which is why they are regulated under insurance law (via provincial regulators) rather than securities law.
Are Segregated Funds Actively Managed?
Yes, the majority of segregated funds in Canada are actively managed.
They have fund managers who actively buy and sell securities within the portfolio with the goal of outperforming benchmarks.
Many segregated funds mirror or “wrap” existing mutual funds managed by firms like RBC, CI, Fidelity, or Manulife. For example, you might see “Manulife Balanced Fund” available as both a mutual fund and a segregated fund.
Since they’re actively managed, they usually come with higher MERs than ETFs or index funds.
That said, in recent years, some insurance companies have also introduced passively managed segregated funds that track indexes (e.g., iA Financial and Sun Life offer some “index seg funds”). But these are less common than actively managed ones.
Key Differences: Segregated Funds vs Mutual Funds
Actively Managed
Most segregated funds = actively managed (similar to mutual funds).
Insurance Guarantees
Seg funds typically offer 75% to 100% principal protection at maturity (usually 10 years) or at death.
This means even if markets drop, your beneficiaries may still receive most or all of your original investment.
Creditor Protection
If you name a family-class beneficiary (e.g., spouse, child, parent), segregated funds may be protected from creditors—important for business owners and professionals.
Estate Planning Benefits
Segregated funds bypass probate when you name a beneficiary. This means faster, private transfer of wealth to heirs.
Higher Fees (MERs)
MERs for segregated funds are generally 2.5%–3.5%, higher than traditional mutual funds (~1.5%–2.5%) and much higher than ETFs (~0.05%–0.30%).
The extra cost pays for the insurance guarantees.
Rate of Return Differences
Since most segregated funds are actively managed, their gross returns are similar to equivalent mutual funds.
However, due to higher MERs and insurance fees, net returns are usually lower compared to mutual funds and much lower than ETFs.
Example: If the underlying mutual fund earns 7% and the seg fund has 3% MER, your net return might only be ~4%.
Summary:
Yes, segregated funds in Canada are usually actively managed funds, sold by insurance companies.
They are essentially mutual funds + insurance benefits (principal guarantees, creditor protection, probate bypass).
The trade-off is higher MERs and lower net returns.