Canada’s big banks all offer various types of market-linked Guaranteed Investment Certificates (GICs). The idea is that your principal is 100% guaranteed, and if the stock market performs well enough you get higher returns than standard GICs pay. It’s like you can have your cake and eat it too. However, the returns usually have a fairly low cap. I decided to design my own market-linked GIC that I’d be happy to offer to the public if it weren’t for two things1.
My Double-Up GIC would offer the potential for a 100% gain over 5 years. The big banks tend to offer much lower maximum returns. The interest paid would be linked to the Canadian TSX 60 stocks and the U.S. S&P 500 stocks. However, even if stocks crash, investors’ principal would be 100% protected and would be paid back after 5 years.
Here is the detailed calculation of the interest payment. In each of the 60 months we start with that month’s compounded share of the potential 100% gain (1.162%). Then we take the month’s returns of each of the 560 stocks and cap each stock’s return at its compounded share of the month’s maximum return (0.206 basis points) and then compound all the stock returns together. Then we compound together the 60 monthly returns to get your final 5-year return. If this final return is negative we move it up to zero; you never lose principal.
A big advantage of the Double-Up GIC is that it uses compound interest rather than the simple interest calculation many of the big banks use to calculate your market-linked GIC returns. We all know that compound interest grows your money faster than simple interest. Another advantage is that my interest calculation is much simpler than the elaborate calculations some of the big banks use.
Like other market-linked GICs, the Double-Up GIC strikes a balance between the bank’s desire for profits and investors’ desire for the appearance of safe access to stock-like returns.
1 Financial regulations and my ethics.