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Market-linked GICs are best for long-term investing, not short-term investing like traditional GICs. You can also choose to invest them for retirement in the registered account of your choosing to reduce or eliminate the amount of tax you pay on your investment and the interest earned. Let’s take a look at how these GICs work at home and how to choose them.
How Market-Linked GICs Work
As we’ve mentioned, market-linked GICs are Guaranteed Investment Certificates that allow you to invest in the stock market with accounts that are based on underlying indexes while protecting your initial investment and without investing directly is stock markets.
Terms for these types of GICs range between one and five years, and they have a guaranteed interest rate to a degree. There’s a minimum guaranteed return that you can earn, with the potential to earn more with a variable interest rate based on the stocks you invest in. This is known as the participation rate.
When you buy a market-linked GIC, there’s also a maximum full-term return rate. Even if the index does better, what you earn can’t go over the specified amount. However, when you do choose to invest in a market-linked GIC, you can choose to invest in a tax-free savings account or a registered retirement savings account to reduce or defer your taxes, which is known as capital gains. It makes a difference whether you invest in registered or non-registered GICs.
Market Linked Vs GICs
While market-linked GICs do differ from traditional GICs, they also have some similarities. Both of these GICs protect the original investment and can be invested into different types of accounts. Unlike market-linked GICs, though, traditional GICs are available in terms less than a year, and they have guaranteed earnings you will get once the GIC reaches the maturity date.
Traditional GICs are fixed-rate GICS, meaning that they have a fixed rate of return, unlike market-linked GICs. Market-linked GICs offer variable rates. They also don’t have guaranteed earnings they just have a guaranteed range due to the fact the return’s linked to how the market performs. While the variable rates do offer the ability to earn with the rate of inflation, the cap on earnings can limit the earning potential.
Pros and Cons of Market-Linked GICs
Just like any type of investment, market-linked GICs have their positives and negatives. Before you get started investing in this type of GIC, let’s take a look at these.
Pros
One of the great things about market-linked GICs is that they allow you to invest in the market without having to risk your principal investment. How much you earn is based on the portfolio you invest in, and you have more earning potential than you would with a traditional GIC.
Cons
Just like with any type of investment, there are some disadvantages. Unfortunately, you, as the investor, don’t get to keep the full return that the index earns. In most cases, you only get to keep 80%. Also, the indexes that GIC issuers generally offer aren’t ones that usually supply higher returns. The financial institution has the power to choose which indexes are up for investment and can choose ones that are more in their favour.
Many companies also have clauses in their contracts regarding market-linked GICs in the case of extraordinary events. These events, such as market disruptions, allow the bank the right to change how the guaranteed return is calculated.
Minimum Return on Market-Linked GICs
The minimum return on market-linked GICs varies based on the bank as well as the financial institution that you choose to invest with. However, the maximum returns that you can earn are no more than 60% per year. Even if the index earns more than that, you won’t be able to earn more interest.
Minimum Investment in Market-Linked GICs
The minimum investment into a market-linked GIC varies based on the financial institution that holds the GIC. That said, the standard minimum is $500; no other investment is required after that.
The Rates on These GICs
The rates for market-linked GICs will always vary. That said, plenty of different financial institutions offer them at different rates. Most financial institutions don’t advertise their market-linked GIC rates, either. This is because the rates are variable, and each GIC has different minimum and maximum rates.
Are They A Good Investment?
Whether or not market-linked GIC rates are a good investment or not is based on which market-linked GICs you invest in and how much you’re choosing to invest. If the rates are good and you’re looking to use market-linked GICs as a part of your investment portfolio to reach your investment goals, then they can be a good idea.
However, it’s not recommended that these types of GICs be your only investment. Before you invest, though, you should pay attention to your personal finance situation, past performance and time horizon, which will all affect your earning potential.
With these types of GICs, your principal guaranteed investment is safe, but what you can potentially earn isn’t always high. While it’s less risky than other types of investment products and financial products, it also doesn’t have as good of earning potential as other investments. It’s a good way to keep your principal investment up, though, and reduce the risk of your overall portfolio. How it works for you, though, is based on your financial situation as well as future performance of the investment.
The Best Market-linked GICs
In Canada, there are many different market-linked GICs from which to choose. Here are some of the best market-linked GICs with the top 5 banks. Many of these banks offer direct investments as well as other types of investments. However, no matter which one you choose, you will earn interest. How much you earn is based on the GIC's equity index performance and ranges based on the financial institutions and stock market indices you choose.
RBC
One option for a market-linked GIC in Canada is with RBC. The one they offer is a 3-year GIC that’s linked to the performance of the S and P TSX 60 index on the Toronto Stock Exchange. The minimum investment for this GIC is $1,000. You can also choose to receive any returns at the end of a two-year lock-in anniversary or when the investment reaches maturity.
TD
TD offers a variety of market-linked GICs. Each of these GICs guarantees the principal, there are no fees, you can choose between 3 and 5 years, and only a low investment is required. The minimum investment for RSP, RESP (Registered Education Savings Plan), and RIF investments is $500, and for non-registered and registered TFSAs, it is $1,000. The 3 different market-linked GICs that they offer are:
- TD Canadian Banking and Utilities GIC
- TD Canadian Banks GIC
- TD U.S. Top 500 GIC
Scotiabank
With Scotiabank market-linked GICs, you can get a variety of different GICs that have a minimum and maximum interest rate. The terms of these GICs range between 2 and 5 years as well. The categories that you can find these GICS are:
- Scotiabank Canadian Top 60
- Scotiabank U.S. Top 500
- Scotiabank Canadian Low Volatility Index
- Scotiabank Canadian Utilites
You can speak to a Scotiabank advisor to find the right one for you.
CIBC
With CIBC, market-linked GICs are based on the performance of different underlying assets. These include things like equities, equity indices and interest rates. Based on the type of investment that you want, they offer 3 different strategies that offer income, growth and income and growth. Each of these different strategies offers different growth potential.
With CIBC, the minimum investment is $500. You can open the GIC in non-registered, RRSP, or TFSA accounts. These accounts are non-redeemable, meaning that you can only access them at maturity, and they’re available in terms from 2 to 5 years. The interest that you’ll get all depends on the investment strategy that you choose.
BMO
BMO also offers market-linked GICs. Their GICs range from 3 to 6 years and have a variety of interest rates. The ones they offer are:
- BMO Smart Return GIC
- BMO Top Performing Portfolio GIC
- BMO Canadian Market GIC
- BMO Select GIC
- BMO Return Enhancing GIC
- BMO Fund Linked GIC
- BMO Growth GIC
- BMO Blue Chip GIC
CDIC and market-linked GICs
The CDIC, also known as the Canada Deposit Insurance Corporation, covers different accounts with registered financial institutions for amounts up to $100,000. In Canada, most market-linked GICs are covered by this insurance, which makes them a no-risk investment. Even if the bank goes under, your funds are still protected.
Are These A Good Investment?
For many, market-linked GICs are a great investment. They’re a good way to invest in market indexes, but you won’t lose money like you would if you invested directly. They’re a great way to offset your other investments, diversify your portfolio, and lock in your savings. That said, they aren’t a great idea for those who are looking to access their funds.
The funds in market-linked GICs are locked. These funds are considered long-term, so it can be a long time before you have access to them. If you lock them into a retirement account, then as soon as you access the funds, you also need to pay withholding tax.
Final Thoughts
In Canada, market-linked GICs are just one of the many different types of GICs that you can invest in. Unlike other GIC investments, market-linked accounts have variable interest rates and different earning potential. However, there are caps on how much you earn, even if the index you invest in earns more. These types of investments aren’t meant to be the only investment that you have. They are meant to diversify your portfolio and help you reach your investment goals.
