If you like the safety of GICs but also want exposure to the stock market, there’s a type of investment for that: market-linked GICs. These investments guarantee the return of your principal along with a minimum interest rate, while also providing limited exposure to stock market movements.
How market-linked GICs work
Unlike a traditional GIC, a market-linked GIC is tied to a particular stock market index—like the Canadian S&P/TSX 60 or the American S&P 500. This gives investors an opportunity to benefit from market gains to a limited extent. We say “limited” because even if the S&P 500 index gains 50% over a three-year period, a GIC linked to that index may limit your gains to, say, 35%.
Any gain isn’t guaranteed, as no one can predict what the markets will do, but the potential upside is there—and your principal is protected regardless of what the stock market does.
Of course, you can invest in the stock market by buying individual shares, mutual funds and exchange-traded funds (ETFs). Unlike these, however, a market-linked GIC ensures that you won’t lose any of your principal if there’s a market downturn. Market-linked GICs offer:
- A guaranteed minimum rate of interest
- Canada Deposit Insurance Corporation (CDIC) coverage of the GIC’s principal and interest, up to $100,000, in case of a bank failure, if the GIC issuer is a CDIC member institution
Additionally, there is no fee to invest in a market-linked GIC or other types of GICs.
How do market-linked GICs and ETFs compare?
Consider this comparison of a traditional Scotiabank three-year non-redeemable GIC with Scotiabank’s US Tracker Index ETF (SITU) and Scotiabank’s three-year market-linked GIC—both tied to the S&P 500 index. (GIC rates current as of Nov. 20, 2023.)
| Term | Minimum guaranteed interest rate | Maximum full-term return | Principal guarantee | Linked index | Fee | |
|---|---|---|---|---|---|---|
| Traditional GIC | 3 years | 4.1% | Not applicable | Yes | None | None |
| Market-linked GIC | 3 years | 2.44% | Limited to 35% | Yes | S&P 500 | None |
| Scotiabank ETF (SITU) | None | None | Matches the index without limit | No | S&P 500 | 0.08% |
Are market-linked GICs a good investment?
Market-linked GICs have several things going for them:
- They’re eligible for both non-registered and registered investment accounts, including the registered education savings plan (RESP), registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA) and registered disability savings plan (RDSP).
- They have a low minimum investment amount—as low as $500, in the case of Scotiabank’s GICs.
- Market-linked GICs are eligible for CDIC protection, up to $100,000 per depositor, at CDIC member institutions.
Are market-linked GICs right for you?
Like all investments, a market-linked GIC could be a good investment if it aligns with your financial situation, financial goals, risk profile and investment time horizon. Typically, these GICs could suit Canadian investors who:
Aditya Nain
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