The TRUTH behind Market Linked GICs - YouTube

This video is all about Market Linked GICs, an investment that's marketed as low

risk with high returns. We're going to start by taking a closer look at what

exactly these GICs are, some pros and cons that you should be aware of and

also some important things you should definitely know before you actually buy them.

You've likely seen promotions through your online banking or maybe you

even saw a poster when walking into your bank or credit union promoting GICs

offering rates well above what traditional GICs are paying. These GICs are

commonly referred to as Market Linked or Equity GICs.

So what exactly are they and how do they potentially provide higher returns than

your standard GIC? Basically a Market Linked GIC is a type of investment that

usually tracks the performance of either an index or a specific basket of stocks.

As an example, maybe you purchase a GIC that's based on Canadian Banks, so how

well those Canadian bank stocks do over the time-frame that you own that GIC is

going to determine what your rate of return will be. Similar to normal GICs,

they are principal protected so at least you know you won't lose any money.

However the amount of interest that you're going to get isn't going to be

determined until the GIC actually matures and that maturity date could

potentially play a big role in determining how much you're going to

make and I'm going to show you why a little later in this video. Let's take a

look at some of the pros and cons to owning these GICs:

We already know that they're principal protected so you can have peace of mind

knowing that you can't lose any money. And even though your principle is

guaranteed ,you can still participate in stock market returns giving you the

opportunity to earn more interest than what traditional GICs are paying. This

can be a great advantage when interest rates are particularly low. The good news

is as well they're usually eligible for most investment accounts like your Tax Free Savings Account or your RRSP for example.

Here is an example of a typical

market link GIC that can be found at most banks and credit unions and the

first thing that catches my eye is that rate of return of18.88%.

So for an investment where I know that my principal is protected

who wouldn't be interested in that. So let's take a closer look. In this case,

this GIC is based on two indexes a utility and a Bank index and that eye

catching rate of almost 20% is actually for a term of only three years.

The good news is, no matter what you can expect to earn a minimum of 2%.

Now here's where it gets interesting...

Generally when we see rates promoted from banks, whether it has to do with GICs,

loans, or even mortgages, they normally market those rates very clearly

to consumers based on what you can expect to earn or pay on an annual basis.

However, for whatever reason these Market Linked GICs

are not marketed to us in the same way. If we actually take a closer look at the

fine print, we can see that those rates are what you could potentially earn over

the entire three-year time frame. Meaning, that 2% guaranteed rate is

actually only equivalent to about 0.66% per year and that 18.88% rate

is actually a maximum of 6.3% per year.

Now 6.3% point is nothing to complain about when we're talking about

GICs but the point that I'm trying to make here is you really want to take

your time be thorough when reading that material and make sure you know what

you're getting into before you purchase one of these GICs. Considering what we've

learned, are there any major cons that we should be aware of? Well first of all you

can't access your money so if you think there's a possibility that you might

need access to that investment do not buy that GIC. Secondly, that rate of

return is going to be heavily determined on the maturity date with no exceptions

and I'm going to show you what that means in a second. Third, it's possible

that you could end up with a GIC with a 0% rate of return. What we're looking at

here is a snapshot of historical returns from a 4 year Market Linked GIC

available at another institution. Now most institutions will post their

returns online but if you can't find them they will provide them when

requested and this is information I would be interested in seeing when

deciding whether or not to move forward with one of these products. Now in this

case an investor would have purchased this GIC and it would have matured in

November of 2015. Unfortunately it earned them 0% which

means they only got their principal back. Earning 0% on one of these GICs is

usually the result of the following; either the basket of stocks it was

tracking did in fact earn 0% or the markets went down and the return on

these stocks would have been negative. Now had they purchased this GIC 30 days

later it would have matured in December of the same year so one month later and

instead they would have actually earned 8.7%.

This is what I mean when I say that the maturity dates can have such a heavy

impact on your returns. Had you purchase stocks in the stock market and the

markets went down, then you at least could have waited for markets to rebound

before you sold. But with Market Linked GICs, you don't have that benefit. If

markets are down when your maturity date hits, you are out of luck.

So is this GIC right for you? Well if you're looking for 100% principal

protection, you're willing to forfeit what you could earn on a traditional GIC

in hopes of getting a higher rate of return and you know that you will not

need to access this money then this GIC is potentially a good option for you to

at least consider and mix up your traditional GIC portfolio. This wraps up

our video on Market Linked GICs. If you've ever owned one I'm curious to hear your

thoughts so comment below and let me know. Don't forget to check out our new

website TheIndependentDollar.com. If you liked the video please give me a

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future videos. Thanks for watching.