Recovering from GIC sticker shock

Nor will matters improve any time soon. The Federal Reserve, Bank of Canada and other central banks have suggested interest rates will stay “lower for longer.” The Fed, in particular, has indicated rates are unlikely to rise for at least three years. (Compare the best GIC rates in Canada.)

This is classic “financial repression” and unfair to seniors who saved all their lives and don’t wish to take on the full risks of stock investments at this time in their lives. Adrian Mastracci, portfolio manager for Vancouver-based Lycos Asset Management Inc., says GIC rates are “lower than they’ve ever been” and recommends that even retired clients take on a bit more risk by raising their asset allocation to include more stocks.

Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial, says COVID-19 has exacerbated the low interest-rate environment. “Historically, GICs were a great investment for retirees, but today that is much different. You are lucky to get 1% on a 5-year GIC at a major bank, and 2% was the best I could find at smaller financial institutions. If inflation is 2%, or somewhere close to it, your real rate of return is 0% and that is even before taxes are considered.”  

But what if you insist on leaving half your fixed-income allocation in GICs, as our family used to do? At our stage of semi-retirement, we aim for an asset allocation of roughly 50/50, and for the fixed-income portion historically have split it between laddered GICs and bond ETFs, or asset-allocation ETFs with a healthy dose of bonds. 

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Short of settling for less on the GIC portion, you may have to go to the trouble of leaving a bank-owned brokerage in favor of independent places like Oaken Financial, which has a 1-year registered GIC paying 1.4% and a 5-year GIC currently paying 2% through Home Trust and Home Equity Bank. (All rates in this article are correct as of Jan. 14, 2021.)

Click on Oaken’s site: “Our competitors’ rates.” There, you’ll see People’s Trust GICs ranging from 1.85% for a 1-year registered GIC to 2.15% for a 5-year; while Accelerate Financial and Implicity Financial both pay 1.7% to 2.1%. Wealth One Bank of Canada pays 2.15% for the 5-year but just 1.5% on the 1-year.  

GICs at the major bank-owned discount brokerages likely pay much less.  RBC Direct Investing does offer 5-year GICs from both Home Equity Bank and Home Trust, but they pay only 1.35% or 1.36% on 5-year GICs, as does Equitable Bank. Next best at RBC is VersaBank (1.26%) and People’s Trust (1.24%). The rest of the 5-year pack pay somewhere between 0.8% and 1.2%. Even if you do find a high-paying GIC, you may be constrained by the fact that any vendor in any one account should be limited to the $100,000 limit guaranteed by the Canada Deposit Insurance Corporation (CDIC).

Moshe Milevsky, professor of finance at York University and chief retirement architect at Guardian Capital, says he and his wife experienced GIC sticker shock when a 1-year bank GIC matured at well under 1%. “She, too, was tempted to move to Oaken, which offered a full half-a-percent more, but I had to remind her about the near-death experience of their parent Home Capital a few years ago.…  Those extra basis points are meant to compensate for the credit risk and the stress of opening up the newspaper one morning and reading that there is a ‘run on the bank’ issuing your GIC.” His wife opted to stay put. 

So what about doing as Mastracci suggests and going with a more aggressive asset allocation of 60% or even 70% stocks, moving some maturing GIC cash to blue-chip dividend paying stocks?

Personally, I have reinvested some GIC cash in 2- or 3-year maturities, on the hope rates start to rise three years from now. While 1% or so is pathetic, at least it’s a positive number (ignoring inflation); with so many mentions of negative interest rates in Europe and sometimes floated by central bankers in North America, any positive return is not to be sneezed at. 

Among the gambits I’ve tried is to raise risk slightly by moving some of this cash to ETFs like Vanguard’s Conservative Income ETF Portfolio [VCIP/TSX], which is 80% fixed income but provides a modest 20% equity kicker. Those who don’t wish to mess with their pre-existing asset allocation might consider the Vanguard Global Bond ETF [VGAB], roughly split between US and global bonds, all hedged back into the Canadian dollar.

“At first glance, bond ETFs look great,” agrees Matthew Ardrey. With five-year returns in excess of 4% and YTD [2020] returns of 7% to 8%, this seems like the simple answer to the GIC question.” Unfortunately, those returns were created by falling interest rates. “With the overnight rate at 0.25% and the five-year Canadian bond yield at 0.37%, there is not much more room for rates to drop,” Ardrey says. Future returns are likely to be reduced as new bonds are purchased at lower rates.

As an ardent indexer, Michael J. Wiener of the Michael James on Money blog is a Vanguard fan but worries about broad-based bond ETFs that include a good amount of long-term bonds. He argued in a recent blog that it’s “crazy” to own long-term bonds at current rates, suggesting the alternative of putting their equities in Vanguard’s VEQT (100% stocks) and their fixed income in short-term government bonds or ETFs or non-bank high-interest savings accounts.

One alternative cited by Ardrey is dividend-paying stocks yielding 5% or more, such as Bank of Nova Scotia at 6.38%, or Enbridge at 8.26%: “Tempting, but if you choose GICs for security, are such stocks likely to retain their value if we experience another sharp market decline like the brief COVID bear of March 2020?”

John De Goey, Portfolio Manager with Toronto-based Wellington-Altus Private Wealth Inc. warns: “Don’t reach for yield.… Interest rates are uncomfortably low and will be for a long time, but you need to deal with that rationally.” He says conservative investors who are uncomfortable with volatility should NOT be moving to dividend stocks for income if they can’t handle it: “Their behaviour is likely to get the better of them when markets drop.”

Ardrey’s third option is alternative investments, typically with returns in the 7% to 9% range, and minimal correlation to stocks. Some of these dropped only 1% or 2% after the March bear, compared to 30% to 40% drops in major stock markets. However, most of these investments trade monthly and have redemption fees or may suspend redemptions.  

In short, there is no perfect alternative to the GIC question, Ardrey concludes: “Gone are the days of strong returns with minimal risk. Income investors need to take on some form of additional risk to achieve their return objectives.” 

MoneySense Investing Editor at Large Jonathan Chevreau is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]

MORE FROM RETIRED MONEY:

• How to make the most of your TFSAs in retirement
• Should you delay your retirement because of COVID-19?
• Reconsidering when to take CPP benefits amid COVID-19 risk
• When is the best time to start taking your CPP payments?
• Is early retirement a realistic goal for most people?

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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