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Technology Index-Linked GIC - Average Annual Return: 5.51%
April 28, 2018
4:08 pm
Save2Retire@55
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Hello,
Has anyone tried this before? Any advise? Thoughts? It is like an ETF but holding only big Technology companies. You need to hold it for 5 years though. The good news, there is no fee.
Thanks

April 28, 2018
4:18 pm
Top It Up
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Performance results of other index-linked GICs offered by Merdian

https://www.meridiancu.ca/Personal/Investing/Products-and-Account-Types/Index-Linked-GICs.aspx

April 28, 2018
8:40 pm
Loonie
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If you're prepared for the possibility of getting zero return on your money after five years, then this may be for you.

Compare to five yr GIC at Meridian, guaranteed compounded total return after five years, currently on offer at 3.5%, is 18.77%. Are you willing to risk this for the possibility of another 2.5% p.a.?

If these stocks give dividends, you will not get any. Any profit has to come from stock market valuations.

See previous discussions of market-linked funds on this forum.

In my opinion, if you want to invest in stocks, you will have best results over the long term. If you are interested in technology stocks, then buy an ETF and hold it for 20 years or so. Five years is a short time in the market.
Better yet, buy a large cap ETF with broad diversification; hold it for 20+ years.
Or go back to your Tangerine funds. With those, the rebalancing is done for you and you can choose your exit point to ensure you make money. Even with an MER thrown in, that makes more sense to me.

April 29, 2018
6:42 am
Kidd
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I agree with Loonie. Tech has massive swings, it's very volatile. When the last tech bubble burst, many lost half of their investment.

April 29, 2018
10:34 am
Norman1
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Some of the 16 tech stocks in the basket do pay dividends. I looked up seven of them and the dividends are decent:

Accenture, 1.75%
Apple, 1.55%
IBM, 4.1%
Intel, 2.28%
Microsoft, 1.75%
Oracle Corp, 1.67%
PayChex, 3.25%

According to the fact sheet, the GIC buyer only gets any gains on the mediocre 8 of the 16 stocks. Top 4 performers and bottom 4 performers are excluded at the end. sf-surprised

Too bad if two or three of the stocks "shoot out the lights" in the next five years. Meridian gets to exclude them from the return calculations.

Looks like a great deal for Meridian. They get to keep all the dividends and all the gains on the best 4 of the 16 stocks. They only need to share some of the price gains on the middling 5th- to 12th-place performers.

April 29, 2018
4:23 pm
Bill
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Comparing investing in stocks, etfs and mutual funds to buying market-linked gics doesn't make sense to me, not only in terms of time-frame but otherwise too they are fundamentally different, i.e. the former risk your capital, the latter don't (big difference!). To me market-linked gics should only be compared with other vehicles that guarantee your capital.

And though there certainly are negatives as well as some positives to market-linked gics, advice on specific investments is not helpful without taking into account one's entire portfolio, as well as one's overall financial objectives. It's possible that market-linked gics may work well for some folks for the part of their portfolio that doesn't include regular gics or HISAs, the part that accepts return (but not capital) risk.

April 29, 2018
5:45 pm
Loonie
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There is no reason to buy a market-linked GIC except to participate in the market. An ordinary GIC will always pay a better guaranteed return.

Therefore it is important to compare them to other means of entering that market as well as to vanilla GICs.

With this "GIC", you would be protected from another tech bubble bursting at an inopportune time.

As Norman has pointed out, and as is the norm with market-linked "GICs", they have watered it down so much that the attraction of being in 'tech" pales considerably.

It could be a good project for "play money", I suppose - i.e. money that you don't need to have working for you. If you win, great; if you don't, well, you didn't need that money to be earning for you anyway, right? and you're cool with losing out on the 18+% (before taxes) you could have gotten from a regular GIC.

April 30, 2018
5:39 am
Taxpayer717
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Loonie said

It could be a good project for "play money", I suppose - i.e. money that you don't need to have working for you. If you win, great; if you don't, well, you didn't need that money to be earning for you anyway, right? and you're cool with losing out on the 18+% (before taxes) you could have gotten from a regular GIC.  

Can I ask you, Loonie, where those 18+% regular GIS's can be found?

April 30, 2018
5:59 am
semi-retired
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Taxpayer717 said

Can I ask you, Loonie, where those 18+% regular GIS's can be found?  

If you read post 3 the 18%+ comes from the total return on a 5 year GIC paying a little over 3.5% per year compounded over the 5 years.

April 30, 2018
6:44 am
Taxpayer717
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Thanks, semi-retired. I obviously missed it or forgot about it.

April 30, 2018
8:06 am
Norman1
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Taxpayer717 said
Thanks, semi-retired. I obviously missed it or forgot about it.  

I think that's actually the hope of sellers of market-linked GIC's and seg funds: That you forget or don't notice the 18%+ you would have received, guaranteed, in five years from putting money in a five year GIC instead.

You are actually risking 18%+.

Along similar lines, an insurance agent suggested that those with a paid off home should remortgage and invest it into seg funds. No risk at all because one is guaranteed to receive at least original investment back if one holds for 10 years.

Not true. If the mortgage rate is 3% per annum and one only receives the original investment back in 10 years, then one has actually lost about 3% x 10 = 30% from all the interest paid! sf-surprised

April 30, 2018
11:47 am
Bill
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Norman1, you have to factor in the tax deductibility of borrowing to invest in the seg funds and the income tax on the 30% interest in your last para example, no?

April 30, 2018
6:40 pm
Norman1
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One could factor in the tax deductability of the 30% interest paid. I didn't as I was doing a pre-tax presentation of the results.

Deduction of the interest would reduce the loss. But, it won't turn the loss into breakeven. Someone in a 25% tax bracket would get a 25% reduction in the loss, from 30% of the investment down to (1 - 0.25) x 30% = 22.5% of the investment.

May 3, 2018
5:49 am
savemoresaveoften
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Having worked at banks' trading floor how these are priced, will give a quick summary here:

Some of these market linked GIC only offer partial downside protection (e.g. bank only absorb upto 30% downside, if mkt down more than that, investors assume 100% of the loss, i.e. a digital put, you can research what that means) This one is 100% principal guarantee so its good (worst case, 0% return for investor after 5 years)

As others mentioned, some of the holdings pays dividend and the bank keeps that (not you), one of the reasons why they can "offer" a higher return

Even tho the time horizon is 5 years, you have to decide whether the basket of stocks that the GIC reference will be higher or not on the index set date. Even if the index is marginally lower than the original index fix, you earn zero.

If you are a conservative investor, it works better when you are buying such a product in a down market (as it gives you upside and 100% protection) , as oppose to market at multi year high. Obviously market can be even higher in 5 years time and no one knows with 100% certainty.

May 3, 2018
7:03 pm
Bill
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savemoresaveoften, thanks for the inside and balanced view of these products, it's more helpful than just pointing out the obvious negatives. And if the title to this thread is correct, some of these products have earned folks significantly more (i.e. 5.51% is 84% more than 3%) than your vanilla 100% risk-free GICs.

May 3, 2018
7:43 pm
Norman1
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I wouldn't take that 5.51% average too seriously without seeing how the returns are distributed around it.

For example, 4% is the average of 8.5%, 8.5%, 2%, 1%, 3%, and 1%. Saying average of 4% falsely suggests that is the likely return. Yet, the actual returns show that 4 out of the 6, or 66.7%, of the outcomes are below the 4% average.

There's that saying that figures don't lie. But, liars can surely figure!

May 4, 2018
12:49 am
Loonie
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Norman, Meridian has not posted the details of past returns on the Tech GIC, although it does with most of its other market-linked GICs. I think this is a new offering and that "averages" are based on what might have happened if the GIC had existed. We have no info about how exactly it was calculated or over what time period.

With interest rates rising, index-linked GICs may become less tempting. Consider the Meridian Consumer Staples market-linked GIC. It offers a MAXIMUM of 22% over five years, but Ganaraska is offering 21.67% in a compounded 4% vanilla GIC. I know which one I'd take! Not everyone can access Ganaraska, but there will be others if present trends continue for a while.

May 4, 2018
3:24 am
Bill
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It tells you how the 5.51% is calculated, i.e. over 200 monthly periods, looking back 5 years each, starting sometime in 2001 (check out the specifics in the downloadable pdf on the site).

Swings are irrelevant, average return is - e.g. 0%, 2% and 8% over 3 years (i.e. outcomes below the average 67% of the time) still beats 3 years of steady 3% each. You can do what you want with numbers, true, but average of 5.51% still beats any lower number average no matter how wild the ups and downs.

May 4, 2018
5:59 am
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Loonie said
There is no reason to buy a market-linked GIC except to participate in the market. An ordinary GIC will always pay a better guaranteed return.

First off let me say that I've never liked mutual fund-type investment instruments and have never invested in them BUT, having said that, I totally disagree with this statement. The REAL problem with this offering is the elimination of the top 4 performers, the non-credit of dividends, and the maximum cap - remove those conditions and the return on this investment will make any return on GICs look like absolute chump-change.

Again, the ONLY way to get any pop in your accumulation to wealth path is through the stock market OR through a substantial inheritance from your grandma. Playing with GICs, is for old folks.

May 4, 2018
7:31 am
Bill
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It's pretty basic: if you want to earn guaranteed interest with that money, it's essentially HISAs, plain GICs and gov't savings bonds, and if you want more than just straight guaranteed interest income with that money (dividends, capital gains/losses), it's all the other financial instruments available. These market-linked products, even though they very well may be a poor investment choice, are in the latter group (they pay out a portion of market gains in the form of interest), so to compare the two is comparing apples and oranges, it's ignoring the very different (saving vs something other than just saving) original objectives for that money.

I agree GICs won't give you a "pop" to wealth but GICs have their place for some folks for at least part of their overall portfolio, and it's not surprising that this site would be a place to find those who heartily believe GICs are generally or even 100% the way to go. No matter what age not everyone needs to risk their money (I like living frugally, or I hit it lucky in a business venture and I've already got $10 million, or some day I've got a gold-plated pension coming, etc), some are just fine with their financial situation as it is. So for them GICs are an easy place to put money.

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