Constructing a GIC Ladder

Fixed Income
GIC Ladder

Guaranteed Investment Certificates (GICs) are a low risk investment instrument which allow Canadians to save comfortably. Issued by banks or trust companies, they’re considered a safe investment because the initial principal is protected on top of the interest earned. Depending on the financial institution, there are many different type of GICs, with different terms length and interest rates.

GICs are popular among Canadians due to their guaranteed interest plus they’re insured with CDIC (Canada Deposit Insurance Corporation) in event of a default by the issuer.

GIC Laddering

To reduce interest rate sensitivity among GICs, investors could embrace a GIC ladder strategy. This strategy could maximize the GIC returns while not locking all of your funds into a single GIC.

  1. The strategy involves dividing your money into 5 different portions. Each portion would be invested and locked in for a specific number of years at the stated interest rate.
  2. Upon the maturity of the first GIC, the funds can be either re-invested in another 5 year rolling GIC or withdrawn at your convenience.
  3. The investment and lock up periods could be crafted in a way that you’re comfortable with. For this example, we used a 5 year strategy.

Benefits of a GIC Ladder

  1. Higher Interest Rates – Through laddering your GICs, you may be able to invest in higher interest rates especially in a rising rate environment.
  2. Less Sensitivity to Interest Rates – When rates are rising, your funds can be reinvested in higher rates GICs. In times of falling rates, you’ve managed to lock yourself at higher interest rates.
  3. Access to Funds – As each GIC matures, you’re able to decide if you want to withdraw the funds or keep re-investing them into another 5 year GIC.

GIC Ladder Example

Jim is a low risk conservative investor who has $25,000 he wants to invest in GICs. He is concerned about interest rate sensitivity and would like to spread out his $25,000 into 5 different GICs. Upon the maturity of each GIC, he would rollover the funds into another 5 year GIC. This is known as a GIC ladder.

GIC Ladder Example
With a GIC Ladder strategy, the funds would be spread out over a number of years to reduce interest rate sensitivity.