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Market-linked GICs
November 25, 2019
3:08 pm
Bud
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I thought this a decent deal but it ended today apparently. Keep us posted on any other exceptional deals you see in this space

"Earn a guaranteed cumulative rate of 9.00%, with a maximum return potential of 20% with Alterna’s 5 Year Global Diversified Guaranteed Return MarketTracer Term Deposit! Your principal is 100% guaranteed and you can benefit from the potentially higher returns a market investment can provide."

https://campaigns.alterna.ca/market-tracer/

GIC King

November 26, 2019
7:08 am
chamnic
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I tried those in the past, they're not really worth it in my opinion.

You are guaranteed 9% over 5 years which comes out to 1.8% per year. Right now, you can get a 5 years GIC at 2.9% so you are risking 1.1%/year to potentially get 4% and thus an extra 1.1% (assuming you get the 20% market increase).

And the way they calculate the performance is not straight up based on the increase of the index they follow, they add all closing end of month values of the index and divide this by the length (in month) of the term of the market tracer. This is then multiplied by a participation rate (varies on the market tracer). In other word, say the market is stable for 5 years and goes up by 20% shortly before expiry, you are not getting the 20% because average of each month will not come that high.

Make sure you read the prospectus before investing in those and fully understand how they calculate performance.

November 26, 2019
8:33 am
Bud
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Went thru list of stocks almost everyone trading close to record highs perhaps "end of month" valuation more advantageous in current long bull run

GIC King

November 26, 2019
9:41 am
GICinvestor
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I believe these have been discussed here before and the conclusion was...they are not a good buy for guarantee or speculated massaging for so so results for the big money.

November 26, 2019
7:56 pm
Norman1
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chamnic said


And the way they calculate the performance is not straight up based on the increase of the index they follow, they add all closing end of month values of the index and divide this by the length (in month) of the term of the market tracer. This is then multiplied by a participation rate (varies on the market tracer). In other word, say the market is stable for 5 years and goes up by 20% shortly before expiry, you are not getting the 20% because average of each month will not come that high.

That's an interesting twist: The average of the monthly closings during the term.

So, if the market goes up 20% over the five years, in a straight line 20% / 60 months = 1/3% per month, then the calculated average of the monthly closings will be up 10%, and not up 20%!

One would need the market to go up around 40% to get the 20% increase in the calculated average to get that the extra 1.1% of return!

November 26, 2019
8:21 pm
Norman1
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chamnic said
I tried those in the past, they're not really worth it in my opinion.

You are guaranteed 9% over 5 years which comes out to 1.8% per year. Right now, you can get a 5 years GIC at 2.9% so you are risking 1.1%/year to potentially get 4% and thus an extra 1.1% (assuming you get the 20% market increase).

Could have receive 2.9% per annum guaranteed in 5 years or +15.3657% in five years.

If one, instead, receives +9% in 5 years, then that's the same as losing 5.517% of the principal initially and putting what's left in the 2.9% per annum, 5 year GIC:

(1 - 0.05517) x (1 + 0.029)5 = 1.0900

One is, in effect, risking 5.517% of the principal. sf-surprised

November 27, 2019
6:23 am
savemoresaveoften
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Norman1 said

chamnic said
I tried those in the past, they're not really worth it in my opinion.

You are guaranteed 9% over 5 years which comes out to 1.8% per year. Right now, you can get a 5 years GIC at 2.9% so you are risking 1.1%/year to potentially get 4% and thus an extra 1.1% (assuming you get the 20% market increase).

Could have receive 2.9% per annum guaranteed in 5 years or +15.3657% in five years.

If one, instead, receives +9% in 5 years, then that's the same as losing 5.517% of the principal initially and putting what's left in the 2.9% per annum, 5 year GIC:

(1 - 0.05517) x (1 + 0.029)5 = 1.0900

One is, in effect, risking 5.517% of the principal. sf-surprised  

Not risking your principal as you will always get your own money back. You are risking the guarantee return of a straight fwd GIC for a higher potential return.

Averaging month end favors the issuer most of the time as it dilutes the positive return (assume mkt just trends higher over time). If mkt drops on some month end, it works against you as well. You downside is protected by the guaranteed min return anyway so even if mkt trends down during the term, you dont really benefit from the averaging anyway.

November 27, 2019
8:38 am
Doug
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Not sure I agree with Norman's complicated fuzzy math there. For one thing, I'm not sure 2.9% 5-year GICs are still available. The 9% is the minimum rate of return; you can earn more than that. It depends on how things are allocated currently, but looking at First West's market-linked GIC payouts, all of their market-linked GICs maturing in the past 10 years have paid out between 80-100% of their maximum return.

So, yes, you're taking the risk of under-performing relative to the current market 5-year GIC (by between 0.25-0.75% p.a.), but 1.8-1.9% p.a. is still not bad considering it's on par with what the Big 5 banks are offering on their regular GICs. And you've got potential to earn probably 12-15% over 5 years.

I would call this a "soft" or "potential" buy, just so long as you know that you may under-perform. I've had good and bad stock market GICs (and these were the kind that only guaranteed your principal).

Cheers,
Doug

December 2, 2019
9:22 am
LeBronBMT
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Doug said
Not sure I agree with Norman's complicated fuzzy math there. For one thing, I'm not sure 2.9% 5-year GICs are still available.

Oaken is offering 2.9% 5 year GICs: https://www.oaken.com/gic-rates/

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