These GICs are tailor-made for anxious investors looking for higher payouts

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Today's market-linked GICs are tailor-made for anxious investors: They tap into concerns about record-high stock prices, unsettled bonds and perplexing tweets from the new tenant in the White House. But they won't answer all your concerns.

Perhaps you've seen beguiling advertisements from major banks: Buy a guaranteed investment certificate that is linked to a basket of financial stocks or a major index and receive a handsome return if the value of these underlying assets rise. If these assets fall, no worries – the issuer will still give you a small return anyway.

Right there, your downside risk is eliminated while you still get some exposure to market rallies, which is why these GICs (which are also known as principal protected notes) can appeal to the nervous Nellie within us.

But you need to know what you're getting, and what you're giving up.

Toronto-Dominion Bank offers a GIC that is linked to bank and utility stocks.

It will deliver to investors a return that reflects the performance of the underlying stocks, capped at a maximum of 20 per cent for five years if held to maturity.

If the stocks fall over this period, you'll still get a return of 2 per cent.

TD also has GICs linked to the S&P/TSX 60 index and the S&P 500, generally over two-, three- or five-year terms. They only pay out at the end of the terms.

Similarly, Royal Bank of Canada offers GICs linked to Canadian banks (with returns capped at 25 per cent over five years), Canadian utilities, U.S. stocks and global stocks. Other banks offer similar products.

These market-linked GICs have been around for years (20 years in the case of TD). But the current batch is particularly noteworthy because of today's investing backdrop. Low Canadian interest rates have weighed on regular GIC rates. Consider yourself lucky to find a five-year GIC that delivers more than 2 per cent interest annually.

As well, Canadian and U.S. stocks have rallied 105 per cent and 240 per cent, respectively, from their 2009 lows, raising some concerns about stretched valuations. Government bonds aren't much help: Prices have slumped over the past six months amid rising expectations for U.S. economic growth and inflation.

If that's not enough to rattle some investors, there's also U.S. President Donald Trump's controversial views on trade and immigration.

Market-linked GICs address these concerns, which explains their popularity among investors. According to Investor Economics, the total outstanding market value of these GICs has been rising at an average clip of 12 per cent a year over the past five years. As of June, investors held $55-billion of these notes.

But they have some flaws. What you're getting, at best, is essentially the dividends of the underlying securities, but no stock gains.

That is, the maximum 20-per-cent return on the TD bank-and-utility stock GIC works out to 4 per cent a year. The average yield on a Big Six bank stock is 3.8 per cent.

Similarly, the maximum return on a five-year RBC GIC linked to the U.S. stock market is 11 per cent, or 2.2 per cent a year, which is in line with the 2-per-cent yield on the S&P 500.

If stock markets rally, you'll regret not owning stocks, especially when you factor in the tax implications if the GICs are held in a non-registered account.

At the same time, the downside protection doesn't compete with regular GICs. If the underlying stocks in the market-linked GICs decline, you'll get a token minimum return that works out to be considerably less than 1 per cent a year.

Looking at these pros and cons, market-linked GICs serve as a decent substitute for cash and regular GICs because you might be able to squeeze a little extra return – for slightly higher risk. As a substitute for stocks, though, forget about it: If you want to link your returns to the market, the market is where you want to be.