By Renée Sylvestre-Williams on August 10, 2022
Estimated reading time: 5 minutes

Why GICs might be a better investment than stocks and bonds

By Renée Sylvestre-Williams on August 10, 2022
Estimated reading time: 5 minutes

Recent market volatility has investors looking for safer places to put their money. Here’s why GICs are worth considering for your investment portfolio.

A pair of hands holding up an apple and a donut with a bite in it.

Photo by Andres Ayrton from Pexels

Financial markets have fallen quite dramatically in 2022, and that has made choosing investments even more difficult than usual. The turmoil has made many investors nervous about investing in stocks. The Toronto Stock Exchange (TSX) was down nearly 10% for the first half of 2022, and the S&P 500 stock index was down over 18%. But the thing that has many investors worried, especially the more conservative ones, is the fact that bonds fell over 12% from Jan. 1 to June 30, 2022, as measured by the Financial Times Stock Exchange (FTSE) Canada Universe Bond Index. If you’re looking for an alternative that promises a safe and predictable return, buying a guaranteed investment certificate (GIC) could be an option.

Why would an investor consider a GIC as part of their investment portfolio? Here are six reasons.

1. GICs have a guaranteed return

A GIC is a safe investment with minimal risk. For the first time in about 15 years, GIC rates have breached 5%; meanwhile, the Canada Pension Plan (CPP) is currently estimating a future 6.6% long-run return for Canadian stocks. This suggests that for most investors paying 1% to 2% in fees, their net returns may be comparable to today’s GIC rates. And, unlike with stocks or crypto, you don’t have to worry about volatility reducing your return when you buy a GIC.

Most GICs pay a fixed interest rate, so investors know how much income they’ll get on the certificate’s maturity date (end of its term). Some GICs have a variable interest rate, which is influenced by market fluctuations—their rate of return is not guaranteed, but their principal is guaranteed.

Some investors include GICs as part of the fixed income portion of a diversified portfolio. Others buy GICs to hedge against market volatility, and many people use GICs to safely grow their money while saving towards a large purchase.

2. Investors can choose from different GIC terms

GICs offer terms ranging from three months to 10 years, with a corresponding guaranteed rate of return—generally, the longer the term, the higher the interest. That means you can choose the term that works best for your needs.

If you know you’re going to need your money soon—say, for buying a car, going on vacation or making a down payment on a home—then a three-, six- or nine-month GIC might be the right option for you. If you don’t need access to your money for a while, then a term of one year or more might be the better option.

GICs are great for investors who want to “set it and forget it,” knowing that they’ll receive their original capital plus interest on a specified date—you can’t say the same about investing in stocks.

3. GICs are eligible for CDIC protection

Unlike stocks, mutual funds and bonds, GICs are eligible for Canada Deposit Insurance Corporation (CDIC) deposit insurance, which adds another layer of security—at no charge to you. The CDIC protects deposits up to $100,000 per eligible deposit category at each of its member institutions.

So, if a CDIC member institution fails—it’s rare, but it can happen—the CDIC can reimburse depositors within a few days. See the list of CDIC member institutions.

In April 2020, CDIC coverage was expanded to cover GICs with terms of greater than five years. So, now may be a great time to lock in a longer-term GIC, as rates rise.

4. GICs are eligible for registered accounts

GICs can be held in both non-registered and registered accounts. Registered accounts include registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and others.

If a GIC is held in an RRSP, the interest earned will be taxed when the money is withdrawn from the account. If a GIC is held in a TFSA, the interest earned is tax-free, and withdrawals are also tax-free.

5. GICs are suitable for short-term goals

If you’re saving up for a short-term goal, buying a GIC might make more sense than putting the money in a high-interest savings account (HISA).

For example, EQ Bank currently offers a one-year non-redeemable GIC with an interest rate of 4.35% (as of Aug. 10, 2022). Compare that to what you typically get with a HISA—anywhere from 0.05% to about 3% per year—and a GIC may make more sense, depending on how soon you need access to your money. Plus, you couldn’t predict that kind of return from investing in stocks. In fact, over the past century, the S&P 500 had a negative return about one out of every four years.

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6. GICs can help reduce risk

As investors approach retirement, they can reduce their risk for volatility by moving away from equities and towards fixed income investments, including GICs.

Some investors use an investment strategy called “GIC laddering.” This means buying GICs with different terms (for example, one, two and three years) at the same time, in order to receive a steady stream of income. Each time a GIC matures, you have the option to withdraw the money or reinvest it.

Another potential benefit of laddering is reducing interest-rate risk over time, because your money is not locked in long-term, and you renew different parts of the GIC ladder at different times and rates, rather than all at once.

Where can you find the best GIC rates in Canada?

While most financial institutions offer GICs as part of their offering of investment products, the rates can vary widely.

Digital banks often have GICs with higher interest rates because they have less overhead compared to brick-and-mortar banks. The savings are passed on to customers in the form of higher GIC rates.

EQ Bank, which is a fully digital bank, has some of the most competitive GIC rates in Canada—plus investors who want to buy a GIC (or do other types of banking) can do so online via computer or smartphone. There’s no physical paperwork required, and you can start investing in GICs with as little as $100. EQ offers both registered and non-registered GICs with a wide variety of terms to suit your financial goals. You can learn more about EQ Bank GICs here.

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