I hate false and trick advertising especially when the financial institution posting the ad knows it is misleading and in fact is deliberately seeking to confuse consumers. On RedFlagDeals recently someone asked about a stock-market-linked GIC offered by one of the Big 5 Canadian banks that seemed like a really good offer. It seemed TOO good to me so I went to read the fine print. If another small Canadian financial institution advertised its regular old-fashioned GICs the same way, it could be trumpeting buy a 3-year GIC CDIC-insured from us and get a guaranteed 9.75 %.
What the Big Bank Stock-Market GIC Ad said: Minimum 2% Return, Maximum 18.88%
The reason the ad caught the reader’s eye was that it said the 3-year-term market-linked GIC had a guaranteed return of 2%. That’s not a great rate for a 3-year GIC but it’s not terrible either. And, of course, what else caught their eye was the possibility of an 18.88% return.
The Canadian Banks and Utilities GIC: Don’t Those Sound Like Safe, Sure-Thing Investments?
The basis of the GIC is that if the value of two indices goes up then you can share in the increase by getting a higher interest rate on your GIC.
The product is linked to the gains or losses in value of
- the S&P TSX Bank Index, and
- the S&P TSX Capped Utilities Index.
I’m sure that those two indices were carefully picked. They conjure up “safety” and “sure bet” and “dividends” in the minds of many Canadian investors.
What those investors may fail to consider, though, is how likely it is that those types of stocks will grow significantly in value over the next 3 years. How many average investors realize that dividend-paying utility stocks are expected to DROP in value as interest rates rise?
Do they know the big Canadian banks have recently reached “all time highs” in value and therefore have a lot of room to drop in value perhaps more so than room to grow even higher?
Many investors also know that banks and utilities pay dividends. They think that means that there should be an increase in value of the index and therefore a higher % paid to their GIC. However, the dividends add NO VALUE to the index and are not included in any way in what the person holding the GIC gets paid! It’s a trick used to make the buyer think they are getting a “sure thing” when in fact high dividends are likely to reduce the overall rise in value of the underlying stocks that form the index.
And what is actually included in the index, anyway? I went looking on the internet, and found some information on the TMX website that states that the S&P TSX Bank Index “includes all bank securities (GICS® code 4010) in the S&P/TSX Composite Index.” Does that mean it includes smaller banks like Laurentian, Canadian Tire and National? What about credit unions and trust companies? It’s not clear to me which stocks are in the index.
If I asked you which utilities would be included in the S&P TSX Capped Utilities Index what would you list?
I guessed Enbridge would be in there. After all, that’s who I pay for my natural gas. Is it?
Not according to the TMX website. The companies it lists are:
- Algonquin Power & Utilities Corp.
- ATCO Ltd. Class I Non-voting Shares
- Boralex Inc. Class A Shares
- Brookfield Infrastructure Partners L.P.
- Brookfield Renewable Partners L.P.
- Canadian Utilities Limited Class A Non-Voting Shares
- Capital Power Corporation
- Emera Incorporated
- Fortis Inc.
- Hydro One Limited
- Innergex Renewable Energy Inc.
- Northland Power Inc.
- Superior Plus Corp.
- TransAlta Corporation
- TransAlta Renewables Inc.
No sign of Enbridge. Are these the companies that you are sure are going to grow in value significantly over the next three years?
Isn’t a 3-year GIC with a Guaranteed Minimum of 2% and a Possible Maximum of 18.88% a Great Deal?
Well, if it was 2% a year, guaranteed, and a possible 18.88% a year, probably yes.
That is NOT what is being offered though!
In defiance of all the standard ways to advertise a GIC interest rate, the quoted 2 and 18.88 percents are NOT per year!
The actual guaranteed rate is 0.6633 % per year, which compounds annually to add up to the equivalent of 2% over the entire three years. Many savings accounts pay more than 0.6633% per year. EQ Bank, for example, is paying 2.3% EACH year on its savings accounts.
The 18.88% is similarly misleading. That return is: “Equivalent to the total return over the term of the investment (i.e. not an annualized rate)” For example, it might be like getting just under 6% a year, for each of the three years, compounding to make the equivalent of 18.88% across the three years.
So you are really buying a GIC that will pay you 0.6633% a year for three years and that MIGHT if everything goes really, really well for three years for all of the utilities and banks in Canada, earn you 6% a year.
Which rate do you think the banks expect you to earn?
Remember that they also offer regular 3-year GICs at an annual rate of 1.35%.
They are making you bet half of your guaranteed interest on the stock market surging ahead for three entire years.
Where Can I Get a CDIC-insured 3-Year GIC that Pays 9.75 % ?
If you mean that pays 9.75 % per year for 3 years, no where in 2018.
However, if you use the misleading advertising techniques used for that market-linked GIC above, you could get this GIC immediately in February 2018 at Oaken Financial.
They are offering a 3-year CDIC-insured compound non-cashable GIC that pays 3.15% per year. If you use the same weird math as the bank did in its ad, that means it is paying 9.75 % as the “total return over the term of the investment (i.e. not an annualized rate).”
Trick advertising aside, I’d look seriously at the GIC offerings at smaller institutions like Oaken Financial.
3.15 % for a CDIC insured GIC is a lot more
- than the 0.6633% offered as the minimum rate for the market-linked Big Bank GIC, and
- than the 1.35 % that same bank offers for a non-cashable 3-year GIC.
If you’re in the market for a GIC, buy a real one. And if you want to dabble with the possible higher gains in the stock market, buy a small amount of a stock index. Don’t be confused by trying to combine the two things.
- If I Keep 50% of My Portfolio in Fixed Income What and Where Do I Keep It?
- When is a Guaranteed Investment Certificate not Guaranteed: When GICs Get Risky!
Did you or one of your friends or relatives lose money buying a market-linked GIC? Or are you one of the very, very few who actually managed to make more money from one of these products than from a regular GIC? Please share your experiences with a comment.