# GIC's



## DesignerDee (Apr 10, 2013)

Any one have any experience with RBC MarketSmart GIC's? 

Doing the Canadian Utility versus Canadian Banking for a 2, 3 or 5 year term.

Just looking for some insight.


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## wendi1 (Oct 2, 2013)

I do not have direct experience with this exact product.

However, I was pitched this type of investment at my own bank, and I turned it down because it was too complicated. For me, I like to own the company directly (or indirectly, through ETFs or mutual funds), but not by owning derivatives that track an index.

Derivatives give me a rash. I am never sure if the company that has promised to cover these has enough money to do so, and if they will continue to pay even if times get tough.

If you want 100% principal protection, go for GICs (not RBCs, though, they don't pay enough interest). Guaranteed by the CDIC GICs. For a little more oomph, you might consider owning one or more of the big six banks, or a bunch of utilities, or even the Dividend Aristocrats ETF (CDZ). Free insight. Some would say, worth every penny.


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## the-royal-mail (Dec 11, 2009)

wendi1, have you read the literature on the RBC website? Here are the highlights:

-CDIC insured
-banking (or utility) indexes
-guaranteed return between 5.25 and 25% (if you select the 5 year term)

http://www.rbcroyalbank.com/products/gic/marketsmart-cnd-banking.html

Almost seems too good to be true? The only part I find confusing is the wording at bottom: _"The Minimum Return and Maximum Return are discretionary, set by the Bank at the time of GIC purchase and are expressed as an interest rate per term. Interest rates are subject to change without notice at any time."_

EDIT: Ahhh "per term" so if it pays 5.25% over 5 years that is like 1.05% *per year*. Am I reading this right? Maybe OP thought those % were per annum?


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## wendi1 (Oct 2, 2013)

Yup, I read it. It is still too complicated. As I said, I like things simple.

You thinking about buying some, Royal Mail?


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## the-royal-mail (Dec 11, 2009)

I was actually intrigued when I saw 5.25% guaranteed but upon closer sctrutiny that seems to be a term %. So no, I am already getting 1.15% elsewhere in which case I would agree that this is too complicated for these returns.


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## HaroldCrump (Jun 10, 2009)

These market linked GICs are not true GICs.
They have a guaranteed rate component, and a stock market linked component, which is capped.
The guaranteed rate is inevitably lower than a regular GIC of the same term.

And the market linked component is capped.
It is also usually based on a basket of stocks or index picked by the vendor of the product.

The other huge disadvantage of these products is that they convert tax advantaged stock market income like dividends and capital gains into fully taxable interest income.
Therefore, they are particularly bad for non registered accounts.


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## wendi1 (Oct 2, 2013)

Good point, Harold. Of course, all the returns are fully taxable unless it is in an RSP or TFSA. And historically, these market linked products have not performed well.

Another reason to own the banks directly...


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## fatcat (Nov 11, 2009)

i think that the forum consensus on these market linked gic's is that they are bad investments
you can easily create your own if you so choose


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## brad (May 22, 2009)

There are lots of boutique GICs, almost all of which end up being a better deal for the bank than they are for you. The plain vanilla fixed-rate GIC is usually the way to go, maybe always the way to go.

But I have a related question on "stepper" GICs. These are the ones that start out at a lower rate and then gradually climb to higher rates over their term. For example, here's one offered by my credit union:

1st year	1.45%
2nd year	1.90%
3rd year	2.55%
4th year	3.30%
5th year	3.57%
Average rate	2.55%

Their plain vanilla 5-year CD pays 2.5%, compared with 2.55% for the stepper.

I'm sure there's a catch somewhere, but I don't see it. They always market the stepper option to me, with strong-arm sales tactics, so there must be a benefit to them.


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## AltaRed (Jun 8, 2009)

I think they are banking on making their books look good (better) in the early years while interest rates are still low, and assuming that longer term interest rate creep upwards will mask their larger payouts in later years. 

You might attribute the 0.05% difference as the time value of money not received in the first 2 years, especially for an annual GIC. 

These stepped GICs would also not be in the interest of an elderly senior who might well die before picking up the juicy 5th year rate, or who needs the steady annual income. I wouldn't touch them.


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## brad (May 22, 2009)

AltaRed said:


> I think they are banking on making their books look good (better) in the early years while interest rates are still low, and assuming that longer term interest rate creep upwards will mask their larger payouts in later years.


That makes sense to me. But if you (as a customer) are buying a 5-year GIC, for example as part of a CD ladder, it shouldn't matter to you what the rates are in the individual years unless you're likely to need the money before the 5-year term is up. If you have a GIC ladder it seems this would be unlikely.


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## andrewf (Mar 1, 2010)

These are really just marketing gimmicks. If you want to take stock market risk, you should own stocks. If you want guaranteed returns, GICs are a good bet. You just need to balance how much risk you take. Market-linked GICs are a confusing way of offering poor returns on GICs.


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## AltaRed (Jun 8, 2009)

brad said:


> That makes sense to me. But if you (as a customer) are buying a 5-year GIC, for example as part of a CD ladder, it shouldn't matter to you what the rates are in the individual years unless you're likely to need the money before the 5-year term is up. If you have a GIC ladder it seems this would be unlikely.


If one does not need the money, then compound GICs are best (in a registered account) as one does not have to deal with pesky amounts of interest each year. I am guessing 2.5% per year compounds better over 5 years (end of term) than a compound stepped GIC to end of term. Try the calculation for yourself.

If one needs the money, then why not an equal amount of 2.5% each year to help with cash flow projections?


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## brad (May 22, 2009)

AltaRed said:


> If one does not need the money, then compound GICs are best (in a registered account) as one does not have to deal with pesky amounts of interest each year. I am guessing 2.5% per year compounds better over 5 years (end of term) than a compound stepped GIC to end of term. Try the calculation for yourself.


Ah, thank you, you revealed the catch to me. Now I understand! Sure, the "average rate" is 2.55%, but they don't take the compounding into account, so you end up better off with the 2.5% fixed rate. Very sneaky of them.

Yes, I am building a GIC ladder in an RRSP as part of the "fixed income" portion of my portfolio -- rather than do a lump sum and split it out as is usually done with GIC ladders, I've been getting a new 5-year GIC each year until I have five GICs and then I'll have one coming due each year. Every year when I invest in a GIC, the credit union calls me and tries hard to talk me out of getting a plain-vanilla fixed-rate GIC. I knew why to avoid the market-linked ones but didn't really understand why to avoid the stepper ones. Now I do.


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## brad (May 22, 2009)

AltaRed said:


> I am guessing 2.5% per year compounds better over 5 years (end of term) than a compound stepped GIC to end of term. Try the calculation for yourself.


Hmm, I decided to do the calculation myself, using the figures I quoted above versus a plain fixed-rate GIC at 2.5%. This assumes annual compounding. The stepper actually comes out a little better:

If you assume a $10,000 investment, the stepper ends up at $11,343 after 5 years, while the plain fixed-rate GIC ends up at $11,314. Not a big difference, but it's something. Maybe the stepper's not so bad after all?


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## AltaRed (Jun 8, 2009)

brad said:


> Yes, I am building a GIC ladder in an RRSP as part of the "fixed income" portion of my portfolio -- rather than do a lump sum and split it out as is usually done with GIC ladders, I've been getting a new 5-year GIC each year until I have five GICs and then I'll have one coming due each year.


I built a 5 year GIC ladder in my RRSP the same way years ago based on vanilla 5 yr compound GICs. I have been building the same thing in my TFSA to shelter as much high tax rate income as I can.


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## emperor (Jul 24, 2011)

I bought a $10,000 Alberta Select Market linked GIC RRSP through Alberta Treasury Branch a few years back. With this market linked GIC I can not loose my principle. It is currently valued $15,757 but I can't collect until 2016 so who know what might happen. If for example you would have put 100K into this thing you would have made 57K in 3 years with no chance of loosing your principle.


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## andrewf (Mar 1, 2010)

Personally, I'm not sure it makes sense to hold fixed income in TFSA. Because TFSA room is so limited, it seems to me that it should securities that face the highest expected tax burden per unit of capital invested.

As an example, someone in the 46.41% MTR bracket in Ontario who held bonds/GICs yielding 2% would face a tax liability of 2%*46.41%=0.9282% or $0.93 per $100 of capital invested.

Holding XIU at a dividend yield of about 3% currently with an expected total return of 7% (conservatively) means capital gains of 4% per year. The same person would face a rate of 29.52% on eligible dividends (assume all XIU distributions are eligible dividends for simplicity) and a liability for capital gains at 23.2% gives 3%*29.52% + 4%*23.2% = 0.8856%+0.928%=1.8136% tax per unit of capital per year. So for every $100, you incur additional taxes of $0.88 by holding fixed income in your TFSA rather than stocks like XIU.


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## andrewf (Mar 1, 2010)

Are you sure? I'm not sure how it is possible for you to have seen so much appreciation for a principle protected note bought at any time in 2011. The TSX is only up by ~13% from the lowest level in 2011. I suspect you may just be misinterpreting the statements you are receiving.


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## emperor (Jul 24, 2011)

Honestly I don't know. I don't get statements I just have online banking it says... Original Principle $10,000 Deposit Date: 2/25/2011 Maturity Date: 2/25/2016 Current Balance: $15,757.58 Maybe the fees aren't removed yet or something I'm not sure. It's all in Alberta energy, Suncor and pipeline companies etc


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## andrewf (Mar 1, 2010)

I'm curious. Transcanada is up about 25%+distributions. A 50% return seems pretty incredible considering that the principle guarantee required the note to have a lower leverage than the underlying securities.


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## BlackThursday (Apr 25, 2011)

brad said:


> Hmm, I decided to do the calculation myself, using the figures I quoted above versus a plain fixed-rate GIC at 2.5%. This assumes annual compounding. The stepper actually comes out a little better:
> 
> If you assume a $10,000 investment, the stepper ends up at $11,343 after 5 years, while the plain fixed-rate GIC ends up at $11,314. Not a big difference, but it's something. Maybe the stepper's not so bad after all?


You should do your math again. A stepper doesn't compound. A plain fixed-rate does. Hence in calculating the latter you need to compound each year. The plain fixed-rate wins.

What you should ask yourself, after this little exercise, is "do I really want to do business with a financial institution that so desperately wants to screw me over for a few dollars?"
Other institutions, such as Outlook Financial, actually abandoned steppers a few years ago because they do not benefit their members.


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## brad (May 22, 2009)

BlackThursday said:


> You should do your math again. A stepper doesn't compound. A plain fixed-rate does. Hence in calculating the latter you need to compound each year. The plain fixed-rate wins.


I'm willing to believe this, but I've never seen anything in the fine print to indicate that steppers don't compound. So what you're telling me is that the interest earned each year just gets applied to the principal amount, not the principal plus any interest earned in the previous year? If that's true then steppers are definitely to be avoided, it's just that you'd think there would be all kinds of warnings about this all over the internet. When I do Google searches for strings like "caveats about rising rate or stepper GICs" all I see is people talking about how steppers are misleading because they typically advertise the ending rate, which is higher, rather than the average rate. That's small potatoes compared with this.

Edited to add: I had a feeling of deja vu while writing this, and remembered we'd had this discussion before...in the previous thread andrewf pointed out that I need to use the geometric mean, not the average to figure out the average rate for a stepper return. Duh!


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## BlackThursday (Apr 25, 2011)

My apologies - I am wrong to generalize: you need to check the institution offering the stepper/escalator. Some compound.


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## al42 (Mar 5, 2011)

Anyone have any dealings with these guys? Looks like they are the online arm of Canadian Western Bank.
2.25% for a 16 month GIC looks pretty tempting. CDIC Insured.

https://www.canadiandirectfinancial.com/Personal/


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## icon (Nov 25, 2013)

^ Yes, I have a HISA with them. The few times I have called them the service was good, the rates are good, and I like the fact that it is part of an established institution like CWB.


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## fatcat (Nov 11, 2009)

al42 said:


> Anyone have any dealings with these guys? Looks like they are the online arm of Canadian Western Bank.
> 2.25% for a 16 month GIC looks pretty tempting. CDIC Insured.
> 
> https://www.canadiandirectfinancial.com/Personal/


i had dealings with their online savings account and it was a nightmare ... their web interface is right out of the fifties, their forms for moving money in and out of accounts are primitive and don't even name the to and from accounts ... they use all numbers for both usernames and password ... just numbers nothing else

but the people are nice and they responded to my problem where they took 36K FROM my bank instead of transferring 36K TO my bank, that took a several days to get right

but gic's might be another story, they are a subsidiary of canadian western bank


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## AltaRed (Jun 8, 2009)

I agree CDF's website is antiquated and rudimentary. Their EFT process between institutions is really dumb AND transfers between institutions (at least for me) take up to 3 business days. They keep saying they are working on it but the only reason I stay is for the interest rate in their KeyRate Savings account.


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## al42 (Mar 5, 2011)

Thanks people for the replies.
Might not be worth the headache.


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## emperor (Jul 24, 2011)

I had nothing put problems with CDF and finally gave up on them. Haven't found nothing better though.


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