What's the Best GIC out There?
This week we will be continuing with our topic of Guaranteed Investment Certificates – GICs.
Personally, I find nowadays, many of us have been left with a sour taste regarding interest rates. With all the rate cuts we’ve experienced its becoming increasingly difficult to earn a good rate of return at the bank and we’ve essentially turned our back on GICs and opted for other investments to achieve a higher rate of return. However, I find we fail to realize that they are changes within the GIC investment class that are taking place that do allow us the opportunity to get a higher rate while still having the secure option of maintaining our principal.
Now let me make one thing clear – all investment products come with their own level of risk and reward. GICs themselves come with interest rate risk. It is up to you to do your research and choose the product that suits your needs.
This week, I will be expanding on GICs looking at the different types that can be a part of your portfolio.
Option 1: Market Linked GICs
Market Linked GICs come with higher interest rate risk as the possibility of earning little to no interest exists. That being said, you can also obtain a much higher return should the GIC perform well. Market Linked GIC’s will invest in a group of stocks or holdings that are pre-set by the institution.
For example, a certain market linked GIC may invest in Apple, IBM, Intel, Coke, Nike and Ford.
If you are someone that does not like much risk but still wants some market exposure this can be a great choice as your principal is guaranteed and you are spreading your risk over multiple holdings. It can be a great opportunity that has the potential to enhance your GIC.
Main Advantage: Possibility for a higher return with a diversified market exposure if the pre-set companies perform well
Main Drawback: Possibility of zero or low interest if companies perform poorly but principal is maintained
Option 2: Ladder GICs
The main risk with GICs is interest rate risk varied with your term. Usually the longer the term the higher the rate. However, what happens when you a buy a long term GIC (2-5 years) but after year 1 the bank increases the rate?
The best way to defend yourself against such a situation is using ladder GICs or staggered GIC’s. When you ladder your investment you will be toying with the maturities so they will expire at different time points. For example, lets say you have 1500$ to invest. Instead of buying a long term GIC in one shot – you could break that up into 3×500$ components invested for 1,2 and 3 years. This way after the 1st or 2nd year you can take advantage of re-investing your money at a higher interest rate (should it go up). The rate may also get cut but then only a small amount of money will be exposed.
Main Benefit: Can get an increased rate of return if interest rate goes up
Main Drawback: The rates may go down exposing a portion of your investment to interest rate risk.
Option 3: Index Linked
First let me define an index: An index is a portion of stocks that is a representation of the market as a whole. Since it is difficult to track the movement of every single company listed on an exchange – an index is an effective way to capture the whole environment while focusing on a small sample. The index linked GIC’s are very similar to the market Linked GIC’s however now the GIC will track the index. Again, this a great way to have a potentially higher rate of return as your GIC will be linked to the index – rather then the arbitrary rate set out by the bank.
Main Benefit: Possibility of a higher return – if the index performs well
Main Drawback: Possibility of zero or low interest if the index does not perform well.
Disclaimer: All the above information is my own personal opinion. Please check with your bank or institution for GIC options and applicable GIC rates and terms. In addition, verify the group of shares and index that the GIC will track. It is better to purchase as GIC that is covered by CDIC – registered trademark of Canadian Deposit Insurance Corporation.