Investors should remember about a reinvestment risk when playing short-term securities: Karl Berger
But have higher interest rates really made GICs a more enticing place to park your money?
Finance experts told BNNBloomberg.ca that shorter-term GICs have gotten a boost from elevated central bank interest rates, but cautioned that investors should think carefully about what options fit best with their personal money goals.
WHAT IS A GIC?
“GICs are great as a low-risk investment,” said Natasha Macmillan, business director of everyday banking at Ratehub.ca, said in a telephone interview.
The products are offered over short or long terms, and guarantee a set principal amount of money and interest over a specified period of time, whether that is a few months, a year or several years, so that investors know what they will get back at the end once their money is unlocked.
“That can be very helpful for people who want a guaranteed investment, want something low-risk, or are just trying to maintain money in a safe environment,” Macmillan said, noting that there is also “great deposit insurance” on the products.
HOW DO CENTRAL BANK INTEREST RATES AFFECT GICS?
There isn’t an exact science behind the correlation between the Bank of Canada’s overnight lending rate and GIC rates, Macmillan said, but she said rates will “typically move in the same direction” as a central bank rate decision.
That means she expects GIC rates will probably increase over the next short while, after the Bank of Canada hiked its key lending rate to 4.75 per cent last week.
One-year GICs are currently higher than five-year terms, Macmillan noted, in a reversal of what’s typically seen, as the market anticipates potential rate cuts a few years out – making now a good time for people to look into shorter-term GICs.
“I don't think there's any bad time to get into GICs. We've seen that interest rate grow substantially over the last year, so it's been kind of a great offering for people,” she said.
Scott Sullivan, principal of Canadian products and analytics at Edward Jones, also highlighted that the current GIC structure suggests rate cuts are coming within a few years. That means shorter term GICs offer higher rates for now, but he cautioned the current forecast suggests it’s unlikely people will be able to reinvest at that rate in a year or two.
WHAT ARE THE BEST RATES?
GIC rates currently go as high as 5.2 per cent, according to ratehub.ca, with others at around three per cent.
“Right now, the one-year rates are very high, so that allows people that flexibility if they're looking if they don't want to do a longer term,” Macmillan said.
Karl Berger, senior wealth consultant and director at Cidel Asset Management, said “there’s lots of options now that didn't exist for most of the last 10 years” when it comes to GICs, with short-term rates particularly high.
“That’s fantastic for portfolio managers like us, because it gives us an ability to earn a return in funds that clients don't want to or can't afford to take risk on,” Berger said in a television interview Wednesday.
WEIGH YOUR OPTIONS
Macmillan suggested looking at a comparison site such as ratehub.ca when assessing GIC investment options.
She also advised that people branch out beyond the bank they currently hold money with, as there is a wide variance when it comes to the highest and lowest rates on offer.
“It is really important to do that comparison shopping when it comes to these products,” she said.
Sullivan cautioned that people should understand their goals and work with a financial planner to achieve them, rather than jump right in to GIC investing.
“Start with your plan first,” he said. “Your products are an output of what you're trying to achieve. You don't start with the products.”
Some people may not want to lock their money away for a set period of time, or may not want to miss out on investment opportunities in bonds or equities which could offer higher returns, Sullivan said. He also cautioned that interest rates may not stay elevated forever.
“The GIC might have been better over the past year,” he said. “But is that to say it's going to be better going forward for what I'm trying to achieve?”
Berger expressed a similar sentiment, noting that GICs might not work for everybody despite the attractiveness of current rates.
“Don't be completely sucked in by the notion of high short-term rates,” said Berger. “There is very likely a place for that sort of exposure in many investors’ portfolios, especially if it helps you sleep at night and whatnot … It's very easy to do in the short-term. It may not necessarily be the best thing as far as a longer-term strategy.”