GIC returns being what they are in spring 2021, it’s no wonder that investors are looking for better places to put their money.
‘What are the best ETF alternatives for secure fixed income investments to replace GICs?” a reader asked recently. The answer, sadly, is that there are no alternatives in the world of exchange-traded funds for investors who fit the profile of the typical investor in guaranteed investment certificates.
GICs are all about the guarantee, which covers principal and interest combined for $100,000 at institutions that are part of Canada Deposit Insurance Corp., and higher or even unlimited amounts at credit unions, depending on the province where they’re based. The price you pay for this security is a yield that tops out around 2 per cent for five years. And that’s only if you access alternative banks, not Big Six banks.
ETFs are hugely popular right now because they’re a convenient, inexpensive way to buy into an index of stocks or bonds, or an actively managed portfolio of these or other assets. Some ETFs – they’re called high interest ETFs – hold deposits in bank and credit union savings accounts, which themselves are covered by deposit insurance. But the high interest ETF itself is not guaranteed like a GIC.
Two other issues with high interest ETFs – they’re much better than GICs for liquidity in that you can trade them any time markets are open, but you have to pay brokerage commissions of as much as $9.99 to buy and sell. Also, the yields on these accounts right now are about 0.6 per cent. Quite a few alternative GIC issuers, all with deposit insurance, offer one-year GIC rates of 1.1 to 1.5 per cent. All can be purchased with no commissions.
There are lots of other ETFs that hold bonds, which are often lumped together with GICs as fixed income. But bonds move up and down in price according to interest cycles – rising rates this year have depressed bond prices. GICs are a zero drama investment. They sit in your account, earn interest and mature at the amount you paid.
High interest ETFs might work as a short-term alternative for cashable GICs. But, generally speaking, investors who put a lot of value on the “G” in GIC will not feel at home in ETF-land.