Are there any other market linked products like Market Linked GICs that principal is insured? | General financial discussion | Discussion forum

co said
Even though I cannot find any direct information, the only way that I can think of how market-linked GIC can work are essentially:

1. Buy stocks/ETF that replicate intended index at current market price
2. Buy a put option at current market price as strike price to secure the principal in case of downside
3. Sell a (covered) call option at higher strike price to recoup some of the cost of the put option.
4. Invest any remaining cash in a term deposit.

The difference between the proceed from the call option and the cost of the put option makes up the "Minimum Guaranteed Interest Rate". The covered call limits the "Maximum Full Term Return".

Anyways, no need to understand any of the jargon, since this is primarily a savings forum, but important conclusions, if my belief about how market-linked GICs work are approximately correct, are:

1. There are never any free lunch in the financial market. You are definitely buying some kind of insurance against the stock portfolio for the gauranteed capital.
2. This kind of insurance is by definition a derivative, so this is essentially a deceptive way for financial institutions to sell complex financial derivatives to individual investors.
3. And while I don't have the data to do the analysis, my default assumption is that the financial institutions have embedded a huge management fee into this product. In fact, this fee isn't even transparent.
4. There is no point for CDIC coverage as the funds are fundamentally tied up in the equity market, not as deposit at a bank, unless you think somehow the stock market will fail.
5. If you really wish to have such a product and are willing to spend an hour learning how options work, you can possibly DIY this product, likely with lower fees.

I know this doesn't answer your real question, but market-link GIC's (or any non-transparent financial products advertised to people without ability to see through it) are borderline a scam in my opinion. I'll be happy to be proven wrong though if someone is willing to comment.  

Some good points. I have since read on market linked GICs and sounds they are complex and not transparent so the FI wins bigger.

For casino machines there are rules that certain percentage of it should be wins for the house and rest should be loss for the house (maybe 56% for the house vs 44% for the customer). Aren't there such rules for derivates and the financial markets?