GIC's meagre returns trump risk of stock market
ROB CARRICK / Globe and Mail

October 23, 2008
Suddenly, we're a nation of conservatives.

No, not politically. Investing-wise. With the stock markets a shambles, money is pouring - pouring like Niagara Falls - into guaranteed investment certificates.

GIC sales for the year to date are running at about double last year's level at GICdirect.com, a national deposit broker based in Victoria. "We've been doing this for eight years and this is the biggest spike in volume that we've seen," said Bill Ritchie, the firm's president. "People are saying, yeah, I'm done with the stock market. We've never heard that before."

Royal Bank of Canada, the country's largest bank, reports that GIC sales have jumped 80 to 100 per cent since midsummer. "Since the global meltdown has come to the forefront, we've seen increasing demand for GIC products, and high-interest savings products as well," said Max Thompson, RBC's head of GICs and savings products.

GICs are right up there with Canada Savings Bonds and Government of Canada bonds as the safest investments around. Bank or trust company GICs are protected for up to $100,000 by the federally backed Canada Deposit Insurance Corp., while credit unions have provincial deposit insurance plans.

At a time when North American stock indexes have fallen about 40 per cent from their peak level of the past 12 months, GICs look good even with returns that top out at 4.5 per cent or less at the vast majority of financial institutions. GICs even appear to be taking money away from money market funds, which were a preferred safe zone until some funds in the United States ran into problems that required a federal government rescue. Last month, Canadian investors pulled $4.5-billion out of mutual funds, including $2.5-billion from money market funds.

Simple, comfortable and familiar - these are all attributes of GICs. But that doesn't mean you should buy without strategizing.

On the question of what term to select, GIC sellers say one year is a popular choice right now, but two and three years are attracting some money as well. RBC's Mr. Thompson said five-year terms aren't popular and it's easy to see why. In many cases, there's only a marginal rate premium for locking money in for that long period of time.

Interest rates paid on GICs vary widely among institutions, with the big banks at the low end and online banks, small trust companies and credit unions on the high side. Don't give up on the idea of being able to deal with a name-brand bank while getting a competitive rate of return, though.

RBC's posted two- and four-year annual GIC rates yesterday were 2.6 and 2.95 per cent, respectively, but the bank offered promotional rates of 4.25 for two years and 4.5 per cent for four. At Bank of Nova Scotia, there were special rates of 3.75 per cent for 18 months and 4.5 per cent for 30 months. Your bank's not offering deals like this? Then ask for matching rates.

Or, consider using alternative financial institutions. For example, you could get a one-year GIC paying 4.45 per cent from ResMor Trust Co. of Calgary, a firm that deposit brokers do business with.

RBC's Mr. Thompson said he suspects that RBC's growth in GIC sales has been fed in part by people who want the security of dealing with a name-brand bank. But Mr. Ritchie of GICdirect.com said people are willing to invest in the likes of ResMor to get higher rates.

"A lot of people are biting," he said. "Their main concern is, is it CDIC insured? That question comes up just about 100 per cent of the time."

CDIC's membership list (you can find it at cdic.ca) includes ResMor and any other serious bank or trust company. But given the extreme level of turmoil in the global financial system, some people are questioning CDIC's ability to pay up if multiple institutions fail.

Is there reason to doubt CDIC's solidity? "Oh, god, no," said David Newman, director of information services at Fiscal Agents Savings and Investments Centre in Oakville, Ont. To him, CDIC's federal government backing is sufficient assurance of security.

A lot of people are clearly voting conservative when it comes to their investments, but for how long? If the stock market moves higher, will they take their matured GICs in one year's time and put the money back into stocks and equity funds, or are some people done with stocks?

RBC's Mr. Thompson suggested an answer when he used the phrase "flight to certainty" to describe the rush into GICs. "Some people," he explained, "are stepping back from the market and saying, maybe I'm a little more risk averse than I thought I was."

GICs are H-O-T

Reports from banks and other sellers of guaranteed investment certificates say people are piling into GICs right now as a safe refuge from falling stock markets.

DOUGLAS COULL/THE GLOBE AND MAIL