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They are called "market-linked" or "index-linked" GICs. They promise to enhance the returns of a normal GIC by tying the return to the performance of stocks. They may have particular appeal right now, as rock-bottom interest rates limit conventional GIC yields, and some daring investors might think that stocks, so beaten-down, might be poised for significant returns over the longer terms of these GICs.

But what "market," or "index," drives your return? The answer varies widely from product to product, even among the offerings from a single institution. Examine the range of market-linked GICs from all the major Canadian banks, and you'll see products based on broad stock-market indexes, specific industries, and even custom baskets of stocks with no clear connection to each other.

Which means the question of just what stocks you're "investing" in with your GIC purchase is one of many you need to ask before buying in to the products.

"You have to look under the hood, and the key words you have to look for in the offering documentation are 'reference portfolio,'" says John De Goey, a portfolio manager with Burgeonvest Bick Securities Ltd. "What are the stocks in the reference portfolio?"

First, though, the basics of the market-based GIC, which has nearly as many technicalities as there are investment options. All these GICs guarantee the principal of the investment, but with the exception of a handful of "minimum return" GICs, the yield on the investment is zero when the market declines.

The gain, however, is typically limited, often in creative ways. Some GICs offer a "participation factor," such as Royal Bank's Canadian Market-Linked GIC, which gives you just 40 per cent of the underlying stocks' performance. (If the stocks gain by 10 per cent, your return is 4 per cent.) Others simply cap the gain at an aggregate return, such as the maximum 9 per cent over three years you can earn in the BMO Select GIC.

And National Bank of Canada's Global Precision 10 GIC and Canadian Precision 10 GIC draw from a pool of 20 stocks, but ignore the best five and worst five performers, calculating your return from the middle 10.

The fact you get some, but rarely all, of the performance from the underlying stocks makes it all the more important to understand exactly what you're getting. Many products with names that include phrases like "Canadian market" are indeed based on the broad S&P/TSX 60 index, and include energy and mining stocks. Another popular variation, however, is to include just the banking sector, or utilities sector, or both.

The BMO Blue Chip GIC is a 50-50 mix of the S&P/TSX banks index and the S&P/TSX capped utilities index, as is Toronto-Dominion Bank's Security GIC Plus. (Each have small minimum guaranteed returns.) RBC offers separate GICs for each of the two industry sub-indexes.

The appeal to investors is the well-known names. But the institutions that offer these like them for different reasons. The returns for the GIC holders are nearly always based on just the price appreciation of the underlying stocks, not the total return including dividends.

The banks who sell the GIC products often enter into forward contracts with other institutions to replicate the price returns of the underlying holdings. The fact the underlying stocks pay dividends make the contracts more advantageous to the banks, and help underwrite the cost of the products, Mr. De Goey says.

"It's a bit of a trick that the people who manufacture these things pull," Mr. De Goey says. "They put in these most-conservative, quote-unquote blue chip stocks, and you get the price return … So why are [the banks] making a big deal about putting [these] stocks in if you don't get to keep the dividend anyway? The reason is investors are comforted, and the people who manufacture these products love it because they're the ones who are keeping the dividend. Give me the non-dividend stocks!"

This can also be seen in the custom portfolios the banks select for their market-linked GICs that don't hew to any established index like the S&P/TSX 60 or the S&P 500. The BMO Growth GIC is based on 15 Canadian stocks, all of which pay dividends, which the GIC owners do not receive, yielding at least 1.7 per cent. The portfolio includes the five banks other than BMO and six energy or resource companies, including TransAlta Corp., currently yielding 18.4 per cent.

Earlier this month, Bank of Nova Scotia dropped Manulife Financial Corp., Shaw Communications Inc. and TransCanada Corp. from its "Basket of Canadian Shares" and replaced them with Sun Life Financial Inc., Rogers Communications Inc. and Suncor Energy Inc. There were no changes in either the American or Global baskets, which include names such as Bank of America Corp., Home Depot Inc. and Wal-Mart Stores Inc. (American) and HSBC Holdings PLC, Carrefour SA and Anheuser-Busch InBev (Global).

The 30 stocks across the three baskets have a median dividend yield of 3.9 per cent, which, again, the GIC owners do not receive.

Scotiabank spokeswoman Allison Watkin declined to say exactly what was behind the changes or how the baskets are chosen. "Our selection criteria is proprietary, however, what we can say is that it is one that we believe will meet our investment customers' needs for diversified equity market exposure in each of the Canadian, U.S. or Global markets while fully protecting their principal at maturity."

The 10-stock basket for Canadian Imperial Bank of Commerce's Guaranteed Market Return GICs includes two stocks — eBay Inc. and Alphabet Inc. — that do not pay a dividend.

Both CIBC and National Bank say their stocks are selected for geographic and industry diversification.

GIC buyers, then, have a whole host of choice in picking the product with the best chance of gains – not counting dividends, of course.


Limited gains

Some banks offer market-linked GICs that, instead of relying on an established index, base their returns on a portfolio or basket of stocks that the banks choose themselves. At 10, 15 or 20 stocks, they're narrower in focus than the S&P/TSX 60. The one thing the stocks have in common? They all pay a dividend, which GIC holder does not get, since these GICs base their returns just on price appreciation, not total return.

National Bank Canadian Precision 10

BMO Growth GIC

Bank of Nova Scotia Basket of Canadian Stocks

Source: Bank marketing and legal materials

Note: National Bank calculates the return by excluding the five best and five worst performing stocks of the 20, using the average return of the 10 in the middle.