Market-linked GIC guide

A market-linked GIC (or Guaranteed Investment Certificate) is a low-risk investment that let you “play the stock market” while guaranteeing your principal. This means your returns are linked to how well your index is performing in the stock market, but you don’t have to risk losing your initial investment if interest rates go down.

Find out more about how these GICs work, how they differ from fixed rate investments and what you need to know before you apply.

How does a market-linked GIC work?

A market-linked GIC is a Canadian investment product that offers fluctuating interest rates tied to the performance of a specific index in the stock market. The main benefit of this type of investment is that you have the potential to earn a higher return on interest if your index does well. And if it’s not performing well, you can rest assured that your principal investment will remain intact.

For example, let’s say you invest in a market-linked GIC (also called a variable rate GIC) tied to an index that measures the stock performance of several major gas companies in Canada. If the companies listed in the index perform well over the term of your investment, you’ll get a high return. But if the market for gas goes down or even stays the same, you could end up with no return at all. This means that when your GIC matures, you’ll only get the principal amount you invested.

That being said, there are also some hybrid market-linked GICs that offer a small amount of guaranteed interest. These investments more closely model fixed rate GICs, which offer a stable and predictable return on investment regardless of what the stock market is doing. These can be a suitable option if you want to factor the interest you earn into your budget.

Why invest in a market-linked GICs?

Market-linked GICs are a safer way to earn interest from the stock market because they are guaranteed to protect your principal. They can also be a more lucrative investment than a fixed-rate GIC because your interest rates can climb much higher, depending on how well your index is performing.

These investments are a suitable option if you don’t mind locking your money away over a longer time period (with terms usually lasting 1-10 years). They can also be a good fit if you want to balance risk in your portfolio, given that they protect your principal investment.

How to compare variable rate GICs

You can compare market-linked GICs based on the following factors.

• Length of term. Terms usually range from 1-10 years, with shorter terms allowing for greater flexibility and an “easy-out” if your index is crashing.
• Minimum investment. You may be able to start a market-linked GIC with as little as $100, but most require at least a $500 investment.
• Redemption type. Cashable GICs let you access your money at any time while non-redeemable GICs come with a penalty for early withdrawal.
• Payment frequency. You can choose to be paid monthly, yearly or when the GIC matures.

Drawbacks of market-linked GICs

Since market-linked GICs protect your principal, there are relatively few drawbacks to investing in one. But there are a few problem areas to keep in mind.

• Lower return. The interest you make may be lower than what you might earn by investing directly in the stock market (or in a fixed rate GIC).
• Less flexibility. You won’t be able to make changes or rebalance your portfolio when your index is performing poorly.
• Capped return. Some GICs will hide a “maximum return” cap in your contract to limit your earnings if the index you invest in performs really well.
• Partial earnings. Your issuer will keep a portion of your profits if the fund performs well.
• Interest subject to taxation. Any interest you earn on your GIC is subject to taxation if the GIC is held outside of your TFSA, RRSP or RESP.
• Less transparency. Formulas used to calculate interest are complex and it can be difficult to understand why you received (or didn’t receive) a return.

Bottom line

Market-linked GICs are a suitable option if you’re looking to invest in the stock market without losing any of your principal. Find out more about how these products work and learn how to compare providers to find the best deal.

Frequently asked questions about market-linked GICs

• What's the difference between a market-linked and a fixed rate GIC?

  A market-linked GIC (or variable rate GIC) fluctuates according to how well a certain index is performing on the stock market. A fixed rate GIC doesn’t rely on the performance of the stock market but offers a set rate that stays the same for the entire term of your investment.

• How can I get the best interest rates on my market-linked GIC?

  The best way to guarantee a higher return on your market-linked GIC is to closely inspect the terms of your contract. In some cases, the issuer will keep a portion of the interest you earn. Other GICs will hide a “maximum return” cap in your contract to limit your earnings on the index you invest in. Make sure you get all the details about how interest is paid out before you sign on to your GIC.

• What happens if I take my money out before the GIC matures?

  That depends on whether you put your money into a cashable or non-redeemable GIC. Cashable GICs will let you take money out whenever you want. Non-redeemable GICs offer higher interest rates, but you’ll typically have to pay a penalty for taking your money out early.

• Can I apply for a market-linked GIC online?

  Yes, you can apply online. Just click “Go to Site” in the table above to be redirected to an application with the provider of your choice.

Image credit: Getty