Dear Expert:
Please explain the concept behind an escalator rate for a guaranteed investment certificate. Are these a good alternative to buying individual GICs under some sort of systematic plan, such as buying a group of GICs with different maturity dates every six months or so? Expert Answer:
An escalator GIC is a long-term deposit certificate that pays increasingly higher rates of interest in each year of the term. For the most part, I don't find them attractive because the rates paid in the early years aren't very competitive with conventional GICs' one- and two-year rates, and the average rate to maturity may not be attractive.
In addition, GICs in general often pay a yield that is lower than one might achieve by purchasing a government bond, such as a strip coupon.
Another alternative is a bond fund with a low management fee. Check GIC rates against the yields paid by such funds. In times of rising rates, a bond fund will suffer, of course, but in more stable times you may find that the fund is much easier to work with. Its units are easily redeemable, and you can keep adding to the same investment vehicle instead of fussing over maintaining diversification among GIC maturity dates (a GIC "ladder") or worrying about having too much exposure to a single banking institution and not being covered by government deposit insurance. While bond funds are not covered by government insurance, the structure of the fund containing a diverse professionally managed portfolio of bonds provides some degree of security.
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
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No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
