# Downsides of Interest- or Market-Linked GICs?



## brad (May 22, 2009)

A portion of my savings are in GICs, and my credit union offers a dizzying variety of 15 GIC flavours: see (in English): http://www.desjardins.com/en/partic...rgne_placements/placement_garantis_taux_fixe/ and http://www.desjardins.com/en/particuliers/produits_services/epargne_placements/placements_indiciels/. 

They're always pushing the interest-linked or market-linked GICs, with a variable interest rate that is linked to changes in the prime rate or stock market indices. In theory this sounds interesting if rates are expected to climb, but because the bank promotes it I'm always suspicious of going this route and opt for the fixed-rate 5-year term (or a ladder that eventually has all my GICs maturing at five years over different periods).

As a general rule am I likely to be better off sticking with the simple fixed-rate GICs (which they call "term savings") or might I benefit from one of these other products instead?


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## Dibs (May 26, 2011)

I think you are better off sticking with simple fixed-rate GICs. I believe that essentially what they do with these market-linked GICs is invest the money for you and take a cut (both the advisor and the bank). Also the returns are often capped at a certain maximum.

Taking a look at one of your desjardins market linked GICs here is one for the canadian index:
http://www.desjardins.com/en/taux/etid/rendement_boursier/canadien.jsp

Some things to note:
* Back in 2009 the max return they allowed was 41% over 5 years. Now they seem to only allow around 23%. That is a max return of around 5% a year. 
* Out of the 42 issues, 33 issues are currently returning 0%, 4 issues under 2%. The other 5 issues returned over 23%, but that was if you invested right after the 2008 crash, and this still only comes out to 6-5% a year. If you invested in the index itself, you would have made around 50% over the same timespan. 

If you want something that is market linked, you can invest in the underlying equities/funds yourself and keep the cut too. 
If you want a fixed income, buy the vanilla GICs or bonds.


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## brad (May 22, 2009)

Thanks, that makes sense. The plain-vanilla GICs have a not-so-competitive rate compared with what I could get elsewhere, but I'm not going elsewhere because I'm investing in the Caisse Solidaire's "placement à rendement social," which provides loans to community organizations, small businesses, environmental groups, etc. in my city. It's the closest thing to impact investing that I can find for my RRSP. It's pretty popular here, growing by more than $30 million a year and with a current reservoir of more than $570 million; it funds a lot of great projects. So I'm wiling to accept a lower rate of financial return in exchange for a higher social return. That said, if the market-linked or interest-linked GIC puts me a little further ahead financially, that would be great of course, but given that the bank doesn't usually promote something unless it's in their interest (rather than mine) I was a bit suspicious when they advised me to go that route.


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## Four Pillars (Apr 5, 2009)

You are better off building your own...

This article explains it pretty well

http://www.holypotato.net/?p=1018


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## CanadianCapitalist (Mar 31, 2009)

You are better off sticking with plain vanilla GICs because structured products like market-linked GICs are always laden with hidden fees. Like Dibs said, you can achieve the same result with a combination of bonds and stocks yourself for a much lower cost.


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## brad (May 22, 2009)

This all makes sense to me: currently my portfolio is about 90% equities (index funds and ETFs, primarily) and I'm trying to build up the fixed-income portion (currently some bond funds and GICs). I'm in my early 50s.

So it's not like I'm trying to get market exposure via my GICs -- I already have plenty of market exposure. For me, it boils down to this: if the variable-rate GICs are likely to give me a higher return even after you consider the hidden fees, shouldn't I go with those? Or is it more likely that the actual return from plain-vanilla GICs will be higher after the fees are considered?


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## Four Pillars (Apr 5, 2009)

brad said:


> if the variable-rate GICs are likely to give me a higher return even after you consider the hidden fees, shouldn't I go with those? Or is it more likely that the actual return from plain-vanilla GICs will be higher after the fees are considered?


If the market-linked GIC rate is comparable to a non-market-linked GIC rate, then I would go with the market-linked GIC because you are guaranteed not to lose on the rate and you might get some bonus points from the equity link.

I haven't researched this myself, but it's my impression that the rates on market-linked GICs are lower than on non-market-linked GICs (which would also be the case for the diy market-linked product). If that is the case, you would need some performance return from the equity portion just to match the non-linked GIC. Depending on the terms of your GIC, this might not be easy to attain.

To be honest, I wouldn't say these products are really bad (maybe some are), they are pretty safe and you will get some of the equity upside (if there is any). However, I'm not a fan of "combination" products. I like plain GICs in my GIC basket and I like plain 100% equity products in my equity basket. As the article suggests it's very easy to build your own market-linked product which doesn't have any upward limit on the equity portion.


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## londoncalling (Sep 17, 2011)

I would agree with the others that suggest a laddered vanilla system... Your fixed income should be fixed and not uncertain even if guaranteed... I can speak from experience as I used to own the above products... I tried one purchase at a five year term and underperformed the market rate(fees eroded my gains). I was content with my return as at that time did not have the knowledge, understanding or desire to be in charge of my $. So, I renewed for another 3 year term and when all was said and down, I got my capital back and my bank got my interest and gains through fees and MERs. I did get the last laugh however, as now I am on my way to being completely in charge of my financial path... I didn`t make a pile of money last year by doing DIY but I did beat the index... So far this year I am down a bit but again ahead of the market...I can attribute that to a stream of growing dividends and a reduction in commissions(less trades) as I have reduced my transactions and have 0 MERs... Sorry for a little bit of a ramble, as stated above... go vanilla... I would currently keep my ladder at 3 years until we see a move in rates but to each their own... Cheers

Che


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## brad (May 22, 2009)

Thanks everyone, I will stick with plain vanilla GICs (which is what I've been doing, just wanted to be sure it was the best approach).


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

Depending on the rates at your bank, you may want to go the HISA route. I did that recently, no fees, free access in/out to my regular account via online banking and no real advantage to GIC vs. HISA.


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## Eclectic12 (Oct 20, 2010)

Four Pillars said:


> If the market-linked GIC rate is comparable to a non-market-linked GIC rate, then I would go with the market-linked GIC because you are guaranteed not to lose on the rate and you might get some bonus points from the equity link.
> 
> [ ... ]


Hmmm ... I haven't read the details in a while but the last I did, the index-linked GIC was a "rear view mirror" type product. The only rate guaranteed at purchase was to return the capital (i.e. 0%).

So at purchase, I'm not sure a rate comparison is useful as it would 0% versus something positive. The one I bought around 1998 or so would have had a purchase rate comparison of 0% versus 1.5% but on payout, compound interest of 22% versus 1.5%. In hind sight, it worked out.

Then too, as others have pointed out, the cap on payouts has changed dramatically. When I asked at the time of purchase, the cap was 98% of the index difference whereas a similar one a year ago was had a cap of simple interest of 40%.

The cap is a reminder of the benefit of asking questions/understanding the product. My tenant bought a similar product without asking questions a month later. He expected the same return but was annoyed when he discovered his cap was simple interest at 10%.


Cheers


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## lonewolf (Jun 12, 2012)

It takes a lot of money to keep the markets well oiled & for most if they want exposure to the market the GICs that are market linked is perhaps the best way because it will limit the losses. But those buying the regular GICs my bet would be with them making the most money over the long hall. I bought a few market linked in Nov 08 & when fear is @ its max it could be something that is a little more easy to step up to the plate & buy. One can be good @ hitting a baseball from one of those machines that throws basballs to a batter. Its another story trying to hit a home run bases loaded in the 9th with thousands of beer soaked fans yelling your a bum.


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## Eclectic12 (Oct 20, 2010)

*Brad:*

Part of the question is whether you want to stick to fixed income or are willing to increase the exposure to equities. At the end of the day, whether the index-linked investment is bank run or DIY - it is still increasing the equities exposure, albeit with a limit.

If you don't want the equities portion, then it's the GIC or interest-linked GIC option.


Cheers


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## Eclectic12 (Oct 20, 2010)

lonewolf said:


> It takes a lot of money to keep the markets well oiled & for most if they want exposure to the market the GICs that are market linked is perhaps the best way because it will limit the losses. [...]


True ... but with the complicated formulas, hidden costs and low caps these days (ex. 10% today versus 98% in 1999) - if I were to do it again, I'd implement a DIY one. The low caps is the most obvious drawback, IMO as I'm not sure I'd want to take on that much risk where if it works in my favour, it is such a small payback.


Thought I already have the needed brokerage accounts and am comfortable with the orders needed.


Cheers


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## brad (May 22, 2009)

Eclectic12 said:


> *Brad:*
> 
> Part of the question is whether you want to stick to fixed income or are willing to increase the exposure to equities. At the end of the day, whether the index-linked investment is bank run or DIY - it is still increasing the equities exposure, albeit with a limit.Cheers


As I mentioned up above, 85% of my portfolio is already in equities so I'm gradually trying to build up the conservative end of my portfolio as I get older.

The interest-linked GIC might be an option although if I construct a ladder I guess it wouldn't be necessary.


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## Eclectic12 (Oct 20, 2010)

brad said:


> As I mentioned up above, 85% of my portfolio is already in equities so I'm gradually trying to build up the conservative end of my portfolio as I get older.
> 
> The interest-linked GIC might be an option although if I construct a ladder I guess it wouldn't be necessary.


I suppose the interest-linked GIC might be a bridge until the enough money has been gathered to make a ladder feasible.
I haven't looked into it, other than to understand the concept.


Cheers


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