HSBC offers the Annual Income Opportunity GIC:
- Opportunity to earn interest each year
- Return based on the 10 stocks Morningstar® analysts believe have earned a "wide-moat rating" – above average company returns and sustainable competitive advantages
- Initial investment guaranteed with 100% principal protection
But the details in calculating the return are somewhat complex. These is a maximum interest of 3.75% for a 3-year term (12.5% total), or 4.50% for 59-month term (22.5% total). And there is a "FLOOR (maximum negative return used in the calculation if a stock performs poorly), i.e., negative 10% for 3-year or 59-month term. Considering you can get a 3% GIC at Oaken Financial, and a guaranteed 16% compounded return for 5 years is the extra 1.5% a year upside from this HSBC GIC worth it considering you have downside market risks? We don't think so. But there are some other products too.
HSBC also offers the Stock Market GIC for non registered accounts. There are 3 types: Canadian (S&P/TSX 60®), Asian (Hang Seng Index®, KOSPI 200 Index, MSCI Singapore Index(SM), MSCI Taiwan Index(SM)), and USA (S&P 500® Low Volatility Index). Each has a minimum return rate of 0%. Each has a 'Participation Rate' which is used to calculate the return depending on the term (3 years or 59 months, or 3 years for the Asian product).
The USA product is worth a look and has a 150% participation rate, meaning you earn 150% of the average of all the index values for each quarter for the next 5 years (i.e., participation does not relate to the final value of the index at the end of 5 year). Here are some examples of what that means:
|Index return - including dividends?|
- The USA index tanks steady over 5 year - you get 0% and wish you bought the Oaken GIC
- The USA index climbs in a straight line up to the right, earning about 15% a year, and doubling in 5 years - you get a total 75% return, equivalent to about a 12% annual return. As this chart to the right shows, that has happened in the past.
What is attractive about this?
- You participate (benefit from) a high the index in the first years, even of the index tanks in year 5 - you are not stuck with the final index. This is good if you think a correction may be years away.
- You can earn a lot more than the measly maximum return of the Annual Income Opportunity GIC.
The HSBC participation rate is high relative to other products like the TD's market GIC products that can return a maximum of 25% in 5 years (Financial GIC Plus and Utilities GIC Plus). The TD U.S. GIC Plus has a maximum of only 20%.
The CIBC products like the CIBC Guaranteed Market Return GICs have a cap (26.25% total for 5 years) but also have a minimum return (5% total for 5 years). CIBC calculates a 'Coupon Rate' for each year based on individual stock return and considers a 'floor' just like the HSBC Annual Income Opportunity GIC. and notes "Coupon Amounts payable in respect of the GICs will not include any dividends declared on the Shares".
So just like the Meridian market linked product reviewed earlier (meridian-index-linked-gics), you are participating in the share price and not the total return. Considering that from December 1990 to July 2013, the S&P 500® Low Volatility Index had a long-term median dividend yield of 4.6% and always stayed above 3.5%, you are giving up a lot of steady / guaranteed dividends to guarantee your principal with a market linked GIC.