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What's an Index-Linked GIC and why should I get one?

If you’ve started researching “how to invest my savings”, chances are you’ve come across Guaranteed Investment Certificates (GICs). Traditionally, GICs have been fixed income investments with terms ranging from 30 days to 5 years, and guarantees on the principal and rate. Yet fixed-rate GICs aren’t the only game in town. Depending on your time horizon, comfort level with risk, and your plans for your money, an index-linked GIC could better suit your needs. Here’s what you need to know.

What is an Index-Linked GIC?

Also known as market-linked GICs, index-linked GICs are guaranteed investment certificates with a return linked to the performance of a stock market or industry sector index. Like fixed rate GICs, index-linked GICs have a set term, often between one and five years, and your principal is guaranteed. The performance in the stock market or sector the GIC is “linked” to determines the return. 

Why should I invest in an Index-Linked GIC?

Not everyone can stomach the ups-and-downs that stock markets (and even industry sectors) typically experience. Investing in an index-linked GIC gives you the potential to earn a higher return than other fixed income products, with the security of guaranteed principal.

As with a traditional GIC, with an index-linked GIC at a minimum the principal is 100 percent guaranteed. And with some types of index-linked GICs, investors receive a minimum guaranteed return. However with other types, a minimum rate of return on an index-linked GIC is not guaranteed. Before investing, consider whether you’re willing to forego the guaranteed return offered by a GIC in exchange for the potentially higher return of an index-linked GIC.

Types of Index-Linked GICs

Just as there are many different stock markets indexes and sectors, Meridian offers several different index-linked GICs such as:

Canadian Diversified Index-Linked GIC: 3 or 5 year terms offer exposure to Canadian equity markets

American Diversified Index-Linked GIC: 5 year term based on 20 biggest American companies

Global Diversified Index-Linked GIC: 1 and 5 year terms based on 20 of the world’s biggest corporations in varied sectors

Financial Services Index-Linked GIC: 3 or 5 year term based on Canada’s renowned financial services providers

* Consumer Staples Index-Linked GIC:3 or 5 year term based on growth potential of major players in this sector

* Health Care Index-Linked GIC: 3 or 5 year term based on growth potential of the international health care sector *

Depending on your financial goals, one or more of these index-linked GICs could suit your portfolio. *Note: these three types of index-linked GICs offer a minimum guaranteed return

What to watch for

As with any investments, it’s important to read the fine print accompanying your index-linked GIC purchase agreement. In particular, look out for the following:

Minimum Return on an Index-Linked GIC 

Sometimes stock markets and sectors don’t see a gain over the term of an index-linked GIC - they may/ even experience a loss. A minimum return is just what it sounds like, a  guaranteed minimum return, even if the index doesn’t have an average positive return over the GIC term. Take note: minimum returns may be lower than a fixed-rate GIC with a comparable term, and not all index-linked GICs offer them.

Maximum Return on an Index-Linked GIC

Some index-linked GICs come with maximum returns. So even if the index soars, your return is limited to the maximum noted in your GIC agreement. For example, if the index returns 15 percent  yet your  three year index linked GIC has a maximum 12 percent return, you get 12 percent, not the 15 percent of the index itself.

Participation Rate of an Index-Linked GIC

This refers to how much your GIC “participates” in the actual gain of the index it’s linked to, and like maximum returns it limits the GIC’s earning potential. For example, a GIC with a 60 percent participation rate limits your return to 60 percent of the index’s gains. So if the index rises 20 percent during the term of your GIC, your earnings are limited to 12 percent.

All of Meridian’s index-linked GICs, such as our Canadian 3-Year Diversified Index-Linked GIC, offer a participation rate of 100 percent. So if the index has a 5 percent per year return, that’s the return on your GIC as well. 

Index-linked GICs aren’t right for every investor, but they could be right for you. To learn more about these GICs and our other investments, visit meridiancu.ca/ilgic