What are index-linked guaranteed investment certificates (GICs)?
Index-linked guaranteed investment certificates are certificates of deposit at a bank or other financial institution that pay interest based on changes in a standard, such as a stock exchange index.
The financial institution that issues it guarantees it and a deposit insurance agency, like CDIC or CUDIC, insures it.
What risks do they have?
Index-linked GICs are higher-risk investments than interest-bearing GICs, which are low risk. The risk level reflects the fact that you don’t know your rate of return even though you know you will get back your principal. The greatest risk for index-linked GICs is that you may not earn a return if the markets do not rise during the term. Index-linked GICs are similar to principal protected notes (PPN), except that your principal is safer with an index-linked GIC than with a PPN.
Can you sell them easily?
No. If you invest in an index-linked GIC, you will almost certainly be unable to cash it in until the term expires.
What are the costs?
There are no costs to buy this type of GIC as the costs are factored into the price when you purchase it. And there are no costs at all since you must hold it until its expiry date.
What are the expected types of returns?
GICs of all types pay interest. Index-linked GIC pay interest based on changes in a market index.
Many index-linked GICs limit the amount you can earn. Some have a maximum performance guarantee so that you receive a return only to the stated maximum regardless of how much it went up. Other index-linked GICs limit your participation to a percentage of the market’s return.
Returns from GICs are interest and taxed as income, even if the increase in a market index determines what the return is. You will likely pay a higher tax rate on the returns from index-linked GICs than returns based more directly on an increase in value of an index.