Personal Finance

How is market-linked GIC?

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  • Dec 8th, 2018 12:18 am
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Newbie
Mar 6, 2017
22 posts
2 upvotes

How is market-linked GIC?

Just know this kind of GIC recently. It is said it has the potential to make more profit. Anyone knows about it? Is it worth to invest in?
18 replies
Jr. Member
May 21, 2015
102 posts
19 upvotes
Not sure. I don't think they pay interest or dividends , so there's one con.
Newbie
Feb 3, 2015
39 posts
19 upvotes
Kirkland Lake, ON
Basically, it's a GIC for a 3 or 5 year locked-in term, which is guaranteed to pay a specific amount of interest. It also has a higher rate of interest attached to a specific cap, depending on how the market performs. The rules around how much it would pay are complicated and you may/may not get the higher rate; this is interest not dividends or capital gains. I don't like the locked-in term because of my age, and the basic rate is the same as or not much better than a regular gic. Since the market is so volatile these days, and will probably go down over the next few years, it may not be worth purchasing one of these.
Deal Addict
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Aug 10, 2015
1347 posts
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St. Catharines, ON
sierra135 wrote:
Dec 3rd, 2018 9:20 am
Basically, it's a GIC for a 3 or 5 year locked-in term, which is guaranteed to pay a specific amount of interest.
Sometimes, only the principal is guaranteed, and at the end of a term, you could earn zero interest. It sounds bad, but in the market conditions that would lead to that, some investments would be losing value.

I've had a few market linked GICs in the past from TD. I don't recall the exact percentages they ended up yielding, but I remember I was not dissatisfied with the result. Sorry I can't be more specific.
Deal Addict
Oct 7, 2007
4165 posts
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My mom has had a lot of success with these getting the maximum payout in several cases. However, I am a little less of a risk-taker and just stick with the higher yield GIC's even if I have to lock in for longer to get a better rate.
Deal Addict
Nov 25, 2014
1718 posts
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Newton Brook, ON
rkjredflag wrote:
Dec 3rd, 2018 9:35 am
Sometimes, only the principal is guaranteed, and at the end of a term, you could earn zero interest. It sounds bad, but in the market conditions that would lead to that, some investments would be losing value.
This makes sense when considering putting all your money into the market versus putting everything into a market-linked GIC... but fortunately those aren't the only 2 options. You could also split your money between the market and a regular GIC.

From many places you can get a 5-year GIC for 3.5%, compounding annually, which is about 19%. If that's half the money, the other half could lose 18% and you would still have the 1% gain (on half... 0.5% gain on the total). Consider that even in the recent crashes of 2000 and 2008, there was never a total loss of more than 11% over any 5 year period (source).

You could go more conservative and put 75% in the GIC. If the market lost 50%, it only takes 12.5% off your total, but the GIC adds 14%. So even with a repeat of the Great Depression you would earn something, not zero.

In the more common case, you would see 40% or more from the market. On 50/50 that's a 30% gain, and on 75/25 it's a 24% gain. These market GICs are usually capped, don't include dividends, or have some other rule that lowers your potential return. I think in most cases it's much more worth it to just take the split approach with an index fund, and treat both as if they are locked in.
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Aug 10, 2015
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nmclean wrote:
Dec 3rd, 2018 1:17 pm
This makes sense when considering putting all your money into the market versus putting everything into a market-linked GIC... but fortunately those aren't the only 2 options. You could also split your money between the market and a regular GIC.

From many places you can get a 5-year GIC for 3.5%, compounding annually, which is about 19%. If that's half the money, the other half could lose 18% and you would still have the 1% gain (on half... 0.5% gain on the total). Consider that even in the recent crashes of 2000 and 2008, there was never a total loss of more than 11% over any 5 year period (source).

You could go more conservative and put 75% in the GIC. If the market lost 50%, it only takes 12.5% off your total, but the GIC adds 14%. So even with a repeat of the Great Depression you would earn something, not zero.

In the more common case, you would see 40% or more from the market. On 50/50 that's a 30% gain, and on 75/25 it's a 24% gain. These market GICs are usually capped, don't include dividends, or have some other rule that lowers your potential return. I think in most cases it's much more worth it to just take the split approach with an index fund, and treat both as if they are locked in.
I think these market linked GICs have their target customer as a nervous investor, who is risk adverse, and not interested in doing a lot of reading and learning to better understand their options. But, they want the opportunity to earn more, than some base GIC rates.

When I used these linked GICs, I was extremely risk adverse, so they seemed like a good choice, since the standard GIC rates TD was offering at the time were very poor.
Member
Jan 4, 2017
305 posts
139 upvotes
Just be sure to carefully understand the terms and conditions. Usually, people buy GICs because they offer a bit higher rate than high interest savings account in exchange for the funds being locked in for a certain period of time and it's guaranteed as the name implies. However, with market-linked GICs usually the guaranteed part is just the principal and a very low rate. For example with TD: https://www.tdcanadatrust.com/products- ... CTable.jsp

Those rates look good right? TD Canadian Top 60 GIC, guaranteed return: 5%. Not so fast. Scroll down to the fine print at the bottom, and it says "Equivalent to the total return over the term of the investment (i.e. not an annualized rate)". The ACTUAL guaranteed return on those market linked GICs are between 0.3%-0.9%! Yikes.

I highly recommend sticking to the standard high interest savings and regular GICs if you're extremely risk-averse (guaranteed not to go down in value). There are some financial institutions offering up to 3.75% on GICs right now, but those rates are usually for 5-year terms. I think EQ Bank has the highest short term rate for 3 months at 3.33%. Otherwise, accepting some level of risk brings in the possibility of much greater returns in the market. Can't have it both ways. :)
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Oct 7, 2007
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zcypher wrote:
Dec 3rd, 2018 2:25 pm
Just be sure to carefully understand the terms and conditions. Usually, people buy GICs because they offer a bit higher rate than high interest savings account in exchange for the funds being locked in for a certain period of time and it's guaranteed as the name implies. However, with market-linked GICs usually the guaranteed part is just the principal and a very low rate. For example with TD: https://www.tdcanadatrust.com/products- ... CTable.jsp

Those rates look good right? TD Canadian Top 60 GIC, guaranteed return: 5%. Not so fast. Scroll down to the fine print at the bottom, and it says "Equivalent to the total return over the term of the investment (i.e. not an annualized rate)". The ACTUAL guaranteed return on those market linked GICs are between 0.3%-0.9%! Yikes.

I highly recommend sticking to the standard high interest savings and regular GICs if you're extremely risk-averse (guaranteed not to go down in value). There are some financial institutions offering up to 3.75% on GICs right now, but those rates are usually for 5-year terms. I think EQ Bank has the highest short term rate for 3 months at 3.33%. Otherwise, accepting some level of risk brings in the possibility of much greater returns in the market. Can't have it both ways. :)
I agree with your comments 100%.

I am also interested to know who is offering 3.75% for 5 year GIC's right now? I am looking for the best CDIC-insured rates but think the best i have seen is 3.6% at Oaken.
Member
Jan 4, 2017
305 posts
139 upvotes
choclover wrote:
Dec 4th, 2018 11:13 am
I agree with your comments 100%.

I am also interested to know who is offering 3.75% for 5 year GIC's right now? I am looking for the best CDIC-insured rates but think the best i have seen is 3.6% at Oaken.
Looks like Meridian is one: https://meridiancu.ca/personal-banking/ ... yrgic.aspx

Some sites that can be good for searching HISA/GIC stuff: highinterestsavings.ca, ratehub.ca, ratesupermarket.ca, etc.

Ah just noticed your comment about CDIC. Not sure if Meridian is CDIC insured. But these credit unions are covered by provincial insurance, so in the case of Meridian, looks like DICO (Deposit Insurance Corporation of Ontario) up to $250k. a 0.15% difference might not be that meaningful without a huge deposit, depends how important any difference between CDIC vs DICO is I guess.
Deal Addict
Jan 2, 2015
1308 posts
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Toronto, ON
Meridian is insured by the provincial equivalent of CDIC, DICO, which covers most if not all Ontario credit unions, for the same $100,000. Other provinces have different organizations but they all run off the same model.

The biggest issue with index/market-linked GICs are the market "cap". Most will only give you a percentage of the market increase (eg 60%) or a maximum cap (whatever percent, I've seen as low as 5% per year), although of course you can't outright lose money on the product. (Of course, if you put the money in for five years and the market went down, you couldn't sell or otherwise get out, and you've basically lost money to inflation. It's not very flexible.)

And you need to pick something covering a broad portion of the market (which isn't that different from buying into an index fund).
Deal Expert
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Jan 27, 2004
39390 posts
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T.O. Lotto Captain
They only make sense for one type person... a very very specific type of person.
Someone who is deftly afraid of the markets. The type of person with a stubborn personality who would NEVER EVER invest in the markets.... Someone with an irrational fear and won't even entertain the idea of anything remotely related to being invested in anything that has a possibility of fluctuations.

MArket linked GIC's allow a person with this type of personality to have some exposure to markets while guaranteeing their principal.
Deal Addict
Aug 5, 2006
3154 posts
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Global Village
zcypher wrote:
Dec 3rd, 2018 2:25 pm
Just be sure to carefully understand the terms and conditions. Usually, people buy GICs because they offer a bit higher rate than high interest savings account in exchange for the funds being locked in for a certain period of time and it's guaranteed as the name implies. However, with market-linked GICs usually the guaranteed part is just the principal and a very low rate. For example with TD: https://www.tdcanadatrust.com/products- ... CTable.jsp

Those rates look good right? TD Canadian Top 60 GIC, guaranteed return: 5%. Not so fast. Scroll down to the fine print at the bottom, and it says "Equivalent to the total return over the term of the investment (i.e. not an annualized rate)". The ACTUAL guaranteed return on those market linked GICs are between 0.3%-0.9%! Yikes.

I highly recommend sticking to the standard high interest savings and regular GICs if you're extremely risk-averse (guaranteed not to go down in value). There are some financial institutions offering up to 3.75% on GICs right now, but those rates are usually for 5-year terms. I think EQ Bank has the highest short term rate for 3 months at 3.33%. Otherwise, accepting some level of risk brings in the possibility of much greater returns in the market. Can't have it both ways. :)
Your warning about TD GIC's is on the money, I had to help an aunt get out of such a GIC where TD did not mention the rate is not annual, TD reps seem to care more about the commission they make on these than on making sure their GIC customers are fully informed of their investments.

And I am not a fan of market-linked GIC products either, customers don't realize that if the market tanks later and you end up with little to no returns you have actually lost $ due to inflation.
All day I dream about sports
Jr. Member
Dec 5, 2016
140 posts
110 upvotes
I have a little bit of money on one of these, if I had to remake the decision today I'd much rather just put it in an EQ Bank or Oaken GIC (for registered accounts).

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