Investing: Boost your GIC returns - MoneySense

Investing: Boost your GIC returns

If you use them right GICs have an edge over bonds.

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Everyone needs a little safety in their portfolio, which is why many investors include short- term bonds. But there’s another option that many never consider: passing on the bonds and using GICs instead.

Guaranteed investment certificates get a bad rap. The main reason is the low rates offered by the big banks: at press time, CIBC and Scotiabank offered one-year GICs at a paltry 0.4%, while a five-year certificate at Royal Bank would net you just 2%. That hardly gets your pulse racing, especially compared to mutual funds or exchange-traded funds (ETFs) holding short-term bonds, which yield about 4%.

But it’s an unfair comparison. First, you can do much better with GICs if you enlist the help of a deposit broker. In late September Tom Glover of GIC Broker.com was offering his clients one-year GICs at 1.275% and five-year GICs at 3.3%” if you were tucking away $25,000, he could get you 3.8%.

We hear you scoffing. Even 2.5% or 3% annually from a GIC sounds underwhelming. But when you consider risk and costs, whatever edge short-term bond funds might have over GICs can quickly disappear:

Bonds are riskier

Short-term government bonds — those that mature in less than five years — will drop in value if interest rates go up. Corporate bonds carry the added risk of default. Meanwhile, GICs are insured by the federal or provincial government, so you cannot lose your principal.

Bonds can incur capital losses

The current rate on three- to five-year government bonds is less than 2.5%. Bond funds are able to pay yields of 4% because they purchased their holdings for more than face value. But when these bonds mature, they will be sold at a loss, which will lower the value of the fund.

Bond funds have management fees

Bond mutual funds in Canada often charge over 1% in fees, which quickly cuts a 3% return by a third. When you buy a GIC, you pay no commission and no annual fee, so you get the full return on your investment.