Segregated funds vs. mutual funds vs. exchange-traded funds and how to navigate them

Ashleay: Welcome to the “In Your Interest!” podcast from iA Financial Group, where we discuss your need-to-know economic news and how it affects your finances. All this in under 10 minutes. It is generally said that it's easier to invest in mutual funds than build a portfolio of investments piece by piece. Not everyone has the time or ability to choose the right assets to put in a portfolio. My name is Ashleay. I'm here with my colleague, Sébastien Mc Mahon, our Chief Strategist and Senior Economist here at iA Financial Group. Hi, Sébastien.

Sébastien: Hi, Ashleay.

Ashleay: So, investment funds may be popular, but they're not always easy to understand. Today, we'll try to shed some light on the subject. So, first of all, what is an investment fund?

Sébastien: A good question. A fund consists of money that is pooled by investors and managed on their behalf by a fund manager. This money is invested in various types of investments, such as stocks, bonds or Treasury bills, for example. Fund returns are generally in the form of interest paid to investors, dividends or capital gains. And the performance of the fund depends on investment decisions, the success of the strategies used by the fund manager, as well as market movements. The fund's objectives may include long-term investment growth, regular investment income, preservation of capital, or a combination of all of these objectives. Some funds may also have a specific purpose, for example, supporting economic development and/or job creation.

Ashleay: And we also often hear about mutual funds, segregated funds, ETFs. What's the difference between all these funds?

Sébastien: Indeed, there are several types of funds and it's difficult to find what's what sometimes. So, let's try to untangle all of that. Today, we'll talk about segregated funds or often we use the term seg funds. They're sold only by insurance companies. So, for example, iA Financial Group, we sell a lot of segregated funds. So, if you invest in a seg fund, your capital will be guaranteed at maturity of the contract and death. So, it could be a guarantee of about 75% or 100% at maturity or death. There's a reset of that guarantee from one to four times a year, depending on the type of contract that you own. Of course, this comes with additional costs, but there are other benefits, like tax benefits, state benefits. But for this, I would advise you that you talk to your financial advisor as they're the experts. Also mutual funds. So, a fund that is sold and suggested by an investment advisor, the risks can go from low to high. The risk depends on the assets in which the fund invests, for example, bonds or stocks or money market mutual funds. Compared to seg funds, they are not guaranteed. So, if your capital goes down, you don't have the benefit of a guarantee. Exchange-traded funds or ETFs? They're investment funds whose securities are traded like stocks on a stock exchange. ETFs trade like individual securities, so they can be bought and they can be sold in real time, at any time during the day, during trading hours. Unlike traditional managed funds, which are only valued at the close of the trading day. The majority of ETFs track a benchmark, which means that only a minority of these funds incorporate active management by the portfolio manager, such as in mutual funds or segregated funds.

Ashleay: And you mentioned guaranteed resets for seg funds. Can you tell us a little bit more about that?

Sébastien: Sure. Regardless of market fluctuations, the value of the invested capital is protected—It can only increase. So, at a time of death, for example, the amount paid to the beneficiary or beneficiaries is the greater of the market value of the funds and the value of the guarantee after resets. So, the guarantee gives security to the investors without compromising the long-term growth of the capital. So, maybe here an example would be appropriate. So, let's say you invested $100,000 in a seg fund and after a few years, the value of your position is now worth $150,000. And let's say that over the first four years, you reset the guarantee higher and higher until your guarantee is also worth $150,000. And then there is some volatility. Then you have a market pullback and the market makes it so that the value of the fund returns to $100,000. Then, if there is a life event that happens at that time, if there is a death or if you have the maturity of the contract, then the value of the contract would be $150,000—so the value of the guarantee and not the $100,000—which would reflect the state of the markets at this time.

Ashleay: I see. And how do we do our homework before buying funds?

Sébastien: Well, you need to choose a fund that suits your investor profile and your investment knowledge. This is always key. So, there's multiple types of profiles. Let's say you have a prudent profile. It means that capital security is important to you. You have a low tolerance for volatility. You're mainly seeking investments that offer regular income and capital preservation. If you have the moderate profile, maybe you're seeking a certain level of capital appreciation and your tolerance for risk is moderate, so you would favour investments that offer a relatively stable income. If you have a balanced profile, maybe you're seeking a balance between income and capital appreciation. Your risk tolerance level is average. You would be targeting medium- and long-term capital appreciation. Now, as we're moving towards the other end of the spectrum, you have growth, more of a growth profile, so you're seeking above-average growth and you're ready to accept a higher level of risk. You're a patient investor and you do not allow yourself to be influenced by fluctuations in your portfolio, so you can have a more aggressive position. And the last profile, the aggressive profile, would be you have a strong tolerance for risk and market fluctuations don't really worry you. You're seeking superior portfolio growth. You're willing to accept substantial variations in the value of your portfolio from one year to the next. So, you would have a very aggressive positioning in your funds.

Ashleay: And if the recent market fluctuations have been bothering you and keeping you awake at night, could it be that your investment profile wasn't quite on point?

Sébastien: Exactly. That's always key. So, some investors recently thought they were, at least they had an aggressive profile until volatility started and that's when they started to lose some sleep. So, if the recent market fluctuations are keeping you awake at night, maybe you want to review your profile with your advisor.

Ashleay: Absolutely. And perhaps we can also remind our listeners that they can go listen to the investor profile podcast that we did a little while earlier. And in conclusion, what should you remember about investing in funds?

Sébastien: So, when it comes to investing in a fund, whether it's a mutual fund or a segregated fund, it's important to understand its key features. You need to know what you're buying. You need to know what you're investing in. So, the Fund Facts document is an essential tool to help you make informed decisions. And of course, you know me Ashleay, always the same advice. It's important that you talk to your advisor.

Ashleay: Absolutely. Thank you so much, Sébastien. We'll see you on a next podcast. Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast available on all platforms, visit the economic news page on ia.ca, or follow us on social media.