Thursday, January 22, 2009

Analyzing Market-Linked GICs














  1. Moshe Milevsky (sp?) wrote a book about 10 years ago similar to your post. He talks about Market linked GICs and why and how investors should do it on their own.

  2. Money Minder: Thanks for the pointer. This author has several books. The closest I found to a 10-year old book was Money Logic by Moshe Arye Milevsky and Michael Posner, published in 2000. Does this sound like the right one?

  3. Your right on MJ. PPN's sell because people think they will recieve the entire return if the linked asset appreciates which is not the case. What's worse, is that PPN can be link to much more complicated types of investments like hedgefunds and leveraging schemes.

  4. Great solution. I thought something could be done with a GIC/index fund mix, but the investor wouldn't get much of a boost from the tiny equity portion.

    He would have to use the stock options to swing for the fences, since there is such a small percentage left after the GIC allotment.

  5. Thanks for the link Michael!

    I had previously left a comment in which I had mixed up the option contract numbers and Michael fixed it, but it's a good segue in that a former colleague of mine did the same thing, with real money for his own account. Thought he was buying 10 put option contracts, but entered in 1000 in the terminal (thinking he wanted underlying exposure to 1000 shares). By the time he realized what he had done, he was down $20,000.

  6. Michael James:

    I am personally interested in making my own Market-Link GICs. Thanks for explaining to me the participation rate.

    The one you created has a 55% market participation rate and I think that is really great. I am trying to figure out how 3yr CIBC Stock Market Advantage GIC has a 65% participation rate. 65% participation rate is after CIBC making money off you and mutual fund salesperson making another set of commissions.

    I know options have become very expensive recently. Maybe that is the reason why making your own market linked GIC seems to have a very low market participation rate.

    Using options make you loose the potential gains from dividends. I am thinking that during times of high dividends, one should own equities. During times of low dividends, one should make one's own Market Linked GICs. What do you think?

  7. EconStudent: My bias is toward owning equities all the time with money you won't need for 3 to 5 years. I agree that the apparent high price of options dampens the participation rate of self-constructed market-linked GICs. Your thoughts on dividends made me think about a different way to construct your own market-linked GIC that captures the dividends -- look for Monday's post for details.

  8. The income earned in the Market Linked GICs is considered interest income too, right? So even if the "thing" you're linked to may have a combination of dividends and capital gains, you don't get the cheaper tax cost do you?

  9. Anonymous: Good point. If your investment is outside an RRSP or TFSA, you'll pay a higher tax percentage on market-linked GICs than you would on stocks.