GICs as a fixed-income solution?

A retired couple recently approached us to talk about the possibility of investing in GICs for the fixed-income portion of their investment portfolio. They wanted to discuss GICs as an alternative to bond funds, and during our discussion we touched on the pluses and minuses of this possibility.

GICs offer many pluses, one of them being their return versus government bonds. While 5-year Government of Canada bonds are currently yielding about 1.3%, 5-year GICs are currently returning approximately 2.5%.

Because GICs with up to a 5-year maturity term are guaranteed for up to $100,000 by the Canadian Deposit Insurance Corporation (CDIC), or sometimes higher levels by provincial insurance programs, the risk of holding GICs is no riskier than that of a Government of Canada bond. (The CDIC and provincial websites like the Deposit Insurance Corporation of Ontario have complete information on the coverage limits). These guarantees contrast with the lack of guarantees on corporate bonds.

Another plus for GICs is if interest rates rise. Bonds shrink in value when interest rates rise, which can create a loss. GICs keep their face value even if interest rates change, (which also means that the GIC face value does not increase if interest rates fall), and many individuals like the predictability of knowing what the face value will be at maturity. This is an especially attractive feature when it is the fixed-income portion of a portfolio being invested. 

GICs do also have limits on liquidity. GICs must be held until the maturity date, and while cashable GICs may be available, they do have lower returns. If an unexpected need for money arises,  GICs won’t be accessible until their maturity date. For this reason, many individuals will invest in a laddered GIC strategy where their money is divided into equal parts and invested in GICs with different maturity dates, so some money is available at sooner terms and some at later.

Our discussion resulted in our clients keeping some bond funds, and creating a GIC laddering strategy with other funds. There is no “one size fits all” solution for all clients looking at their fixed-income portfolio, but considering GICs as an alternative or partner to bond funds can result in a positive outcome.