BMO TFSA | Tax Free Savings Accounts | Discussion forum

Norman is right, and it's a very important point.
These are called "market-linked GICs" and are offered by many financial institutions; and one should be wary of all of them. They are sometimes given other kinds of names to disguise the reality.
It's rare that any are a good deal, if ever, and all involve risk either to capital or to interest/dividends/gains you might otherwise have earned, or both. Right now, in particular, the caps on them are very low.
Beware!

I think a lot of people must get caught on these (which is to say they're a good deal for the banks) because they come up as a question on this forum once a year or so as a new idea. Imagine people's surprise when, after 5 years, they find they didn't and perhaps couldn't get the 20% that they thought they'd been promised!

You may find this helpful in understanding how and why it works - at least for the bank!
https://www.moneygeek.ca/weblog/2013/09/30/how-market-linked-gics-work/

Bill said
Loonie, how are these market-linked GICs a risk to capital? My understanding is that your principal amount is guaranteed, as for regular GICs.  

I don't know any that have capital risk myself, but the product stinks none the less. They have found a following in recent years due to the ~9 year bull market, but they will severely under perform if we go through another bear....and that has to happen sooner rather than later, almost guaranteed to do so now within the 5 year term.

AltaRed, I don't understand why the product stinks, I presume many of them have done better than regular GICs as they've benefitted from the 9+ year-long bull market you refer to, no?

Bill said
AltaRed, I don't understand why the product stinks, I presume many of them have done better than regular GICs as they've benefitted from the 9+ year-long bull market you refer to, no?  

Therein lies the issue. They are marketed without appropriate risk being disclosed .If I read it correctly, this specific offer has a base total interest of 3% over 4.5 years (it doesn't say 3% annualized, or 3%/annum). Market linked GICs typically have a low 'base interest' guarantee.

Past performance is no guarantee of future performance and certainly won't be if a bear, or even significant market correction, hits somewhere in that 5 year term. Five years is a long time when it comes to market predictions, and especially at this point in the business cycle (9+ years is a long time without a significant market pullback).

I always try to put that in perspective by looking back an equivalent period and try to imagine what I would have been thinking at that time about the future (in this case 2013). I think these things appeal mostly to those who would not otherwise expose themselves to equity markets directly.

Bill said
Loonie, how are these market-linked GICs a risk to capital? My understanding is that your principal amount is guaranteed, as for regular GICs.  

Depends on which one you get. As the article cited, not all will guarantee 100% of principal. I think, at the moment, most of them do, but one has to read carefully.

Loonie, the TSX is up more than 100% from its 2009 lows, that's the reality you're ignoring when you are downplaying the recent benefits of these products, so I would never give or endorse the advice you give in your last 3 sentences. And you also are indicating their cap is very limited when in fact that is only partially true - there are also some that participate more than minimally in market gains. And you are also positing that the end-date could be when markets are temporarily down, but in fact the end-date could also be when the market is high for extraneous reasons. (No need to focus only on the possible negatives, not a balanced view.) And of course it's stating the obvious that one is better to be directly in the market when markets do well, but that's with the benefit of hindsight.

It's very easy to always find negatives with pretty much any investment, especially for those people who are extremely risk averse. And I don't downplay the obvious negatives of these instruments, but at the same time it's possible they can work out. (And maybe I'm biased the other way because if you are right increased sales of these products can only be good for my bank shares!)

I know someone who bought some recently for his kids' RESP, as his two priorities are to put in the $2500/yr to maximize the grant (20%) while at the same time safeguarding the contribution/principal (along with he wants to spend as close to zero time with his money/investments as possible). Anything else is gravy, as far as he's concerned, so he felt market-linked GICs were fine for this purpose. I hold none of these products myself but I would never presume to tell him these products don't suit his purposes.

Thanks, AltaRed, and yes, there are more and more of these products around, many with very specific indices they track. The low volatility index indicated appears to be up about 35% over the last 10 years so it appears related gic's would have received about 85% X 35% = 29.75% over that time (if that's what's meant by the 85% participation), though of course it all depends on when each gic matured. That's on top of any posted rate for the gic, I presume.

As you point out, rising interest rates don't bode well for this product, but same goes for those locking up their money today for 5-year gic's.

You're right, Loonie, I agree there's no point in me trying to explain anything to someone who thinks a GIC that participates in 85% of market gains (a market which I pointed out has doubled or so in 10 years), plus has some kind of principal guarantee as well as a stated interest rate, earns "a very limited amount". And you're also right re. my bias for Canada's big banks - as I've stated here before I've done very well holding shares of the big banks for decades now and I admit, I do absolutely adore them! (Though I might have to unload them soon as this growing cryptocurrency, blockchain, etc stuff might spell their demise eventually). So glad over the last 25 years or so of low interest rates I've kept my GIC and HISA holdings to just a minimal (undefined!) part of my financial portfolio.