Monday, 15 February 2016

Buying a Market linked GIC - think again




Now that the RRSP season is in full swing.  I am pretty sure there is a high chance that you have been reminded by your bank that you still have time to make your RRSP contribution for the year.  Either in visual posters at the branch, through email reminders, through snail mail reminders, the banks know that  they make money with anything you give them.  But being an investor that is always questioning things, I come across the old Market Linked GIC poster at my local branch.  It guarantees your principal 100% yet I can benefit potentially from a stock market if it was to rise.

Sounds amazing doesn't it?  You win no matter what.  Don't worry if you don't bank at my branch.  All banks have the their version of the market linked GIC.

You have to lock in for either 3 or 5 years.  You get your principal back at the end.  Some have a small guaranteed returned and you have the chance to get a higher rate of return.

What's the catch?  If the markets take off like a rocket, there will be cap on the returned passed to you.  There are also Market linked GICs that average out the return.  For example, if you locked in for 3 years.  The market that you are linked to, say rises 15% each year.  At the end of 3 years, the markets have risen 45% not compounded but then your GIC will return you the average which would be 15%.  Sufficient to say, the market linked GIC that averages the yearly returns is calculated in some unknown way at the end of 3 years that no normal person would understand.  So we don't know if it is even 15% because it has been so long,  like who tracks markets for 3 years and records it.

A big issue with many of these products that track indexes is that the returns are unknown and not particularly flexible.  You are locked in for a term that I am not comfortable with.

These products are designed for investors are not comfortable with the stock market in general.  So why would I want to track a index that I can buy with an ETF that tracks that same index?  I keep the dividends that the ETF pays out and I pay under $10 to purchase the ETF.  I can sell anytime I want.  Again for only $10.  I know if I gain or lose and the calculation is my own calculation so I know it is correct.

To sum it up, market linked GICS are complicated in their calculations, lock in for way too long, and returns are not easy to understand.  There are no fees but the opportunity cost of locking in for that long is too big.  Also, to buy ETFs, you would need a self directed account while GICs or market linked GICs can be bought at the bank without opening a self directed account.

I would not buy a market linked GIC.

Does anyone else have any thoughts or comments on Market linked GICs?