What are Market Growth GICs?

Market Growth GICs are hybrid instruments combining principal protection with exposure to equity markets. Unlike fixed-rate GICs, returns are contingent on the performance of an underlying asset—typically a market index like the S&P 500—while the principal remains guaranteed, usually backed by deposit insurance.

Because financial institutions market these products differently, they can be confusing for consumers. They may be listed as:

• Equity-Linked GICs
• Market-Linked GICs
• Principal Protected Notes (PPNs) (Note: PPNs are technically debt instruments issued by the bank, not deposits. Therefore, they carry issuer risk and may not be covered by CDIC deposit insurance)
• Index-Linked GICs

Return Mechanics

Returns are variable and governed by specific formulas rather than a fixed interest rate:

• Participation Rate Investors often receive only a percentage of the underlying asset’s gain (e.g., 50% or 100%).
• Capped vs. Uncapped While many products cap the maximum return (e.g., 25% over 5 years), uncapped GICs exist. Uncapped variants typically come with trade-offs: they usually offer no minimum guaranteed return and a non-100% participation factor (meaning the investor only captures a fraction of the market’s upside).
• Term Returns Rates are usually quoted as total return over the term, not annualized (APR). A “20% return” over 5 years is approximately 3.7% compounded annually.

Key Constraints

• Dividend Exclusion Returns are based solely on price appreciation. Dividends generated by the underlying index are excluded, resulting in a performance drag compared to direct investment.

  Missing out on dividends can reduce returns by 7.5% to 10% over a 5-year term, even if the market performs well.

• Non-Redeemable These instruments are generally non-redeemable prior to maturity.
• No Periodic Income Unlike traditional GICs or bonds that may pay interest at regular intervals, Market Growth GICs typically pay no returns until maturity. This makes them unsuitable for investors seeking regular cash flow.
• Opportunity Cost In flat or bear markets, the investor receives only the principal, forfeiting the guaranteed return available in a traditional GIC.

Creating an Equivalent Position

An equivalent position can be built by investing in two distinct investments: a traditional GIC and a “call option.”

What is a Call Option? A call option is a financial contract that gives the holder the right (but not the obligation) to buy an asset at a specific price in the future. If the market goes up, the option becomes valuable. If the market stays flat or goes down, the option expires worthless, but the investor loses only the small amount (premium) paid for it.

Example: Replicating a $10,000 Market Growth GIC (3-Year Term)

1. Secure the Principal The investor puts roughly $8,900 into a standard 3-year GIC paying 4% interest. By the end of the 3 years, this will grow to exactly $10,000, guaranteeing the initial capital is safe.
2. Buy the Upside The remaining $1,100 is used to buy 3-year call options on the S&P 500.
   • If the S&P 500 rises significantly, the options skyrocket in value, providing the “market growth.”
   • If the S&P 500 falls, the options expire worthless. The investor is left with the $10,000 from the GIC.

Why Build It Independently?

• Tax Efficiency Returns from Market Growth GICs are typically taxed as interest income (100% taxable at the investor’s marginal rate). In the synthetic version, profits from the options are generally treated as capital gains (only 50% taxable). This tax mismatch means the DIY strategy can result in significant savings in non-registered accounts compared to the bank product.
• Liquidity The position can be closed early. Unlike the locked-in bank product, options can be sold at any time to take profits or minimize losses.
• Flexibility The investor chooses the term. There is no restriction to the standard 3 or 5-year offers; GIC terms and option expiry dates can be mixed and matched.
• Choice of Underlying The investor is not limited to the pre-packaged indices offered by the bank. Options can be purchased on almost any index, ETF, or individual stock.

Quick Comparison

*Tax treatment depends on account type and specific circumstances.

Limitations

• Pricing & Sizing Difficulties Options are sold in ’lots’ (usually covering 100 shares). The interest earned from the GIC might not match the exact price of an option contract, leaving uninvested cash or not enough to buy the contract at all. Bank products pool money from many investors, avoiding this issue. Additionally, if the options are too expensive relative to the available interest, it may be impossible to purchase enough contracts to fully replicate the index performance, effectively creating a participation factor of less than 100%.
• Complexity & Access Implementing this strategy requires an investment account approved for options trading. It is more complex than purchasing a standard bank product.