This year’s plunge in interest rates has exposed a quiet flaw in managing your fixed-income investments through an online brokerage.
If you want guaranteed investment certificates, prepare to get hosed. The GIC issuers that online brokers deal with offer rates that fall well short of the best available.
One major bank-owned online broker had a menu of one-year GICs this week with yields ranging from 0.35 per cent at the low end to 0.72 per cent at the high end. Meantime, the rate sheet on the Canadian High Interest Savings Accounts website showed LBC Digital at 2.1 per cent, AcceleRate Financial at 2 per cent and several others at 1.8 to 1.9 per cent. In other words, you could easily get double the rate available through the online brokerage, or better.
One solution is to hold your GIC investments directly with issuers like LBC or AcceleRate. But what if you insist on the convenience and efficiency of having your portfolio in one spot – your online brokerage account? In that case, here are three GIC alternatives:
- Government bonds: Yields are lower than GICs because money has flowed into these bonds in recent months in search of a degree of security against financial-market uncertainty (bond prices and yields move in opposite directions). The price of bonds issued by the federal government and some provinces have risen to the point where one-year yields for retail investors are negative. That means the cost of the bond is higher than the amount you’ll receive at maturity plus interest payments.
- Corporate bonds: They were hammered early in the pandemic and have recovered somewhat, but yields are still generous compared with GICs and government bonds. Higher default risk than both, but you can still get a decent yield and an investment-grade credit rating of BBB or higher.
- Savings-account ETFs: Yields after fees are in the 0.6- to 0.7-per-cent range, which makes them comparable with GICs available at online brokers. Expect to pay a trading commission to buy and sell them at most brokers. These ETFs hold deposits at multiple big banks, but unlike GICs, their structure doesn’t allow for coverage through Canada Deposit Insurance Corp.
Clearly, convenience comes with a price: Other than corporate bonds, there’s not much here to entice you to keep your GIC money with online brokers.
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