Thursday, February 20, 2014

Double-Up GIC – the Catch

The point of my Double-Up GIC was to illustrate the tricky rules used in market-linked GICs by taking these rules to the extreme. The advertising of market-linked GICs makes it seem like you have a guarantee to get your money back if stocks fall and can get the market return if stocks rise. This isn’t the case. Market-linked GICs have rules that significantly reduce the return you get if the stock market goes up.

The catch with my Double-Up GIC is that each of the 560 linked stocks must go up during all 60 months for you to get your full 100% return. Any excess return for a stock in a month above 0.00206% is wasted, but any drop in a stock counts fully. Across all the stocks there are a total of 560*60=33,600 monthly returns. If all the negative returns compound to a 50% loss, then these losses will completely cancel all the capped positive returns. So, if one-eighth of the stocks show a loss of 1% or more in the first month, you’re already guaranteed to get only your principal back and no added interest after the 5 years. So much for the dream of a double up.

It would take quite a conspiracy to cause the markets to go up so consistently that this GIC pays any interest at all. If I had no empathy and sold such a GIC to some suckers, I would invest enough of their deposits in a 5-year stripped bond to cover the return of principal and invest the rest in two ETFs that cover the TSX 60 and S&P 500. This way I couldn’t lose on having to pay back the principal, and if stocks happen to perform so magnificently (perhaps due to runaway inflation) that I owe some interest after 5 years, my stock investment would most likely cover the interest I owe.

Of course, the tricks the big banks use to limit interest payments aren’t this punishing, but you have to read through the fine print and do some math to see why market-linked GICs won’t give you much of the returns from stocks.


  1. I'm just happy you use your creativity and intellect for good instead of evil. Some people aren't so scrupulous.

    1. @Gene: I guess I'm hampered by empathy :-)