Financial Jungle

Darren Rowse from ProBlogger is hosting another get-together among bloggers. The mission is to write a top 5 list on any topic relevant to the blog, and the winning price is a cool $1001. But more importantly, I want to elevate Financial Jungle’s presence in the blogging ecosystem, and mingle with fellow bloggers who share similar interests.

A discussion over at MillionDollarJourney prompted me to do a little digging into Market Growth GICs offered by Canadian banks. Many investors are risk-adverse, while not wanting to relinquish the growth potential of the stock market. This is why Market Growth GICs are so seductive. Investors’ original principal is guaranteed regardless of what the market is doing, while the performance is linked to the market indices tracked by the products. Being a cynic, I’ve investigated and uncovered the following five gremlins of Market Growth GICs:

1. No Dividends – They stole my precious!
Although Market Growth GICs do track the underlying index, investors forgo the dividends issued by the securities along with the juicy dividend tax credits. As an example, the iShares S&P/TSX 60 ETF rewards their investors with 1.66%, which isn’t available to Market Growth GIC investors.

2. Higher Tax Rate - Give it to us and wrrrriggling! You keep nasty chips.
Since Market Growth GIC investors don’t actually own a piece of the index, gains on GICs are taxed as regular income instead of the more favourable tax treatments from conventional capital gains. For instance, if you’re in the 40% tax bracket, you owe 40 cents for every dollar made in GICs, while you owe only 20 cents in ETFs.

3. No Tax Deferral - NO! That would kill us. Kill us!
Taxes are due each year with GICs, while you can defer capital gain taxes for as long as you hold the ETFs. Let’s do a quick example. If you start with a $1,000 GIC that returns 10% each year, you keep only 6% after tax. Compound this to 5 years and you’re left with only $1,338. On the other hand, you can zoom ahead with ETFs by deferring taxes until the very last year, and are left with a generous $1,488.

4. Capped Return – Don’t follow the light.
A five-year Market Growth GIC offered by TD Bank caps the cumulative return at 60%. This is an annualized compounded return of 9.8%, which is the approximate long-term return for stock markets. As a result, investors have no upside potential relative to the index, while the down side relative performance is –9.8%.

5. No Capital Tax Loss Saving - Stupid fat hobbit, it ruins it.
In the event the market is still down after five years, the principal protection feature kicks in and you recover your loses, however you waive the tax-loss saving to offset capital gain taxes of your other investments.

Principal protection to me is an illusion, because inflation alone will erode the future purchasing power, which is ultimately what you’re trying to protect. If maintaining purchasing power is your objective, stop fooling around with Market Growth GICs, and buy a traditional a 5-year GIC instead at 4.47%. If you still want some exposure to the stock market without exposing yourself to market setbacks, segregated funds are good alternatives. Even though they’re somewhat expensive, you’re compensated with other benefits, which include estate planning advantages, automatic reset of death benefit guarantee, and creditor protection. An example of a segregated fund is CI Signature Dividend GIF which has a price tag of 4.18% MER.

Further readings:
- TD Canada Trust Market Growth GIC.
- How Segregated Funds Protect Your Investments (CI)
- How segregated funds work (Million Dollar Journey)

ps. thank you Canadian Capitalist for bringing this event to my attention.

Tourists have to plan many things like car rental coupons or rent a car by mail. Online surfing for travel information shows many companies offering many things which travelers demand. Discounted and cheaper national car rental facilitates it travelers by all means. Others like hertz car rental and quick car rental suggest advance booking online or through mail for the travelers ease.

I recently came across a Claymore Canadian Preferred Share ETF article written by Rob Carrick of the Globe And Mail. Although I’m by no mean a preferred share guru, I can’t help but feeling leery about the impeccable timing of this release. Just a few months after our finance minister derailed the income trust gravy train, income-seeking investors are now crying for second best options. There is one important lesson I learned during the dot com era: the financial industry creates new products for investors who are too late in the game. This trend never fails. You have technology in the late 90’s, resource and income trusts in early 2000, and now preferred shares. Who knows? Maybe this time is different, but James Hymas from Hymas Investment Management doesn’t think so. To quote Mr. Hymas, who is a formidable force in preferred share:

This construction difference is apparent from the release. The top three constituents are GWO.PR.X, BCE.PR.A and BCE.PR.C. You know what I like? I like indices that are easy to beat, that’s what I like. I might even be able to earn my fees just by avoiding those things and closet indexing the rest of the portfolio!

Unlike common shares, the preferred share world is complex, illiquid and inefficient. This is one of those rare cases, where I believe active management by a preferred share veteran like James Hymas can add value. Too bad I don’t have the net worth or minimum income required to buy his funds.

The preferred share index that the ETF is tracking is yielding 4.66%. In theory, if you subtract the 0.45% MER from the yield, you net around 4.21%. In other words, the ETF gobbles almost one tenth of the dividends before distributing the rest to you. That’s sounds like a lot to me, but I’m not sure if it’s the going rate. Having said that, I’m still interested in adding a preferred share ETF/mutual fund as part of my diversified portfolio, although I may want to proceed after the frenzies cool off.

Folks. Do you have a suggestion or two for me? Feel free to write me a few comments.

A lot has been said of asset allocation, but can we do better than bonds or GIC’s for our fixed-income asset class?

The best current 5-year GIC rate is 4.40%. After paying for taxes, you only keep 3% depending on your tax bracket. That’s barely above inflation! A better option may be to pay down your mortgage. The going rate for a 5-year fixed mortgage is 5.1%. Since a dollar saved is a dollar earned, saving 5.1% on your mortgage is a better deal than earning 3% from bonds or GIC’s. After all, why lend your money to the financial industry just to re-borrow it back at a higher rate?