CIBC Market Linked GIC - Guaranteed Returns, Higher Potential Growth - But Read the Fine Print

CIBC is offering you a chance to be a pig in shining armour with their Market-Linked GICs!

Let's break down the graphic for you. Pigs want more, more, more ...let's say it applies to investment earnings too.  But they are scaredy pigs so they need protection like the armour (i.e., guaranteed principal).

CIBC's says Market-Linked GICs offer these key benefits:

• Higher return potential than regular GICs based on the
performance of Canadian or global market indices
• Your principal is fully protected
• Choice of 3- or 5-year terms (35 or 59 months for
CIBC Stock Market Advantage RRSP GIC)
• Low minimum investment of only $500
• Available as CIBC RRSP and non-registered investments
• Diversification in one easy step

They come in  few flavours depending on whether you want a minimum return: Guaranteed Market Return - Guaranteed repayment of your principal at maturity along with annual interest payments.

Whether you want more upside: Market Return - Guaranteed repayment of your principal at maturity with the potential to benefit from any gains in the underlying index.  

Or something else: Monthly Income Fund-Linked  Guaranteed repayment of your principal at maturity along with a potential return linked to the quarterly performance of the Class A units of the CIBC Monthly Income Fund.

These may be of interest to short term investors as a replacement to meagre GIC interest rates at the bank (especially with the recent cut in Bank of Canada and likely savings rates).  But its not a replacement for participating in the stock market : because participation rates are so low a long term investor would rather be in the market and ride out the ups and downs.  Read the fine print: even a participation rate of 90% - sounds great! - may only give you 45% of the returns at the end of the term, because your earnings are based on the average of the quarterly returns over 5 years.  Meaning if the market doubles in a steady trend upward +100%, the average over the term is only half of the end value, meaning +50% of which you get 90% of that, meaning only 45%.

Key disbenefits would be:

  • you are getting taxed as interest whereas the underlying holdings would give you a dividend that is more favourably taxed
  • long term investors are giving up more than half of the underlying returns with the participation rate based on average quarterly fund and index values