Canadians Love GICs: Can They Do Better?

Editorial Note: Guaranteed Investment Certificates (GICs) are familiar territory for most Canadians. They feel comfortable and safe. Just like the institutions that they are usually purchased from. However, just like other financial advice and products, you should look beneath the surface to understand the true costs. Further, compare that to the alternative options for what you are trying to accomplish. GICs saw a resurgence recently due to their headline interest rates. Many of those GICs are now maturing, and people should reflect on how those investments performed and decide the best path forward for deploying that money. Hopefully, today’s post will help.

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ICYMI: Canadians Love Their GICs

By: Danielle Neziol, VP, Online Distribution

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Intro

What’s the acronym behind over $500 billion of Canadians’ money? ICYMI [that’s “in case you missed it” for the non-hip people like me – LD], it’s the GIC, the Guaranteed Investment Certificate [I knew that one!]. And lately, it’s been having a moment. GICs have long been a go-to for investors seeking safety and stability. But over the past few years, they’ve surged in popularity thanks to rising interest rates, offering returns north of 5%. On the surface, not bad for a virtually risk-free investment. However, they may not be as risk-free as they are touted to be.

GICs have been offered to Canadians since the 1970s and have traditionally been the comfort zone of retirees in their decumulation phase; those who are more focused on preserving wealth rather than growing it. But when rates were climbing, younger investors started parking their cash in GICs. So, the question is: Are GICs right for everyone? And how do they stack up against other low-risk options, such as money market ETFs?

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So, What Is a GIC?

A GIC is a product issued by financial institutions to raise capital. When you buy one, you’re essentially lending your money to the bank in exchange for a guaranteed return. At the end of the term, your principal is returned, and thanks to Canada Deposit Insurance Corporation (CDIC) coverage, your deposit is protected up to $100,000 per category, per institution. That’s why GICs are often seen as one of the safest investments out there. Before buying a GIC, investors need to make two key decisions: term length and redeemable vs non-redeemable.

1. Term Length: Longer terms usually mean higher rates. A 5-year GIC will typically offer more than a 1-year GIC.
2. Redeemable vs. Non-Redeemable: Want the option to cash out early? That’s possible with a redeemable (or “cashable”) GIC. But it comes at a cost. The rate will be lower, and there may still be a short lock-up period.

Why Liquidity Matters

Liquidity describes just how quickly you can turn an investment into cash. Historically, GICs were locked in until maturity. Today, some offer limited liquidity, but it’s still not ideal for investors who might need quick access to their cash.

There are generally two types of GIC investors. The first group is retirees who prioritize safety and steady income, with no immediate need for their principal. The second group are portfolio builders who use GICs as a cash sleeve, aiming to earn something on idle cash while keeping risk low. It’s this second group that should be thinking more about liquidity. A GIC investment with a lockup period means you can’t turn your investment into cash for months or even years. This can be very limiting for an investor who may not know today what they will need cash for tomorrow. The lack of liquidity in a GIC can be problematic for these investors.

So, GICs are not risk-free for everyone. One of the main risks that drives people to GICs is the risk that their money won’t be fully there when they need it. That is a short-term risk with more volatile investments, like equities. However, it is a risk with GICs too – if the time of your short-term need is less certain than you thought it would be. For example, you may have thought buying a home was five years away, but then you see the home of your dreams in three years. The good news is that investors have more liquid options beyond the GIC.

Enter: Money Market ETFs

If you are managing a cash sleeve in your investment portfolio and you want those cash-like characteristics of stability and flexibility, money market ETFs might be your new best friend.

These ETFs invest in short-term, high-quality debt mostly from the Canadian government or financial institutions. Most holdings mature in under 6 months, making them low-risk and highly liquid. Since money market ETFs trade on the stock exchange, you can buy or sell them anytime during market hours which makes them highly liquid investments.

Take BMO’s Money Market ETF (ZMMK). It’s currently yielding around 2.6%, with rates adjusting monthly based on the Bank of Canada’s overnight rate. The ETF is intended for short-term cash management, though it is less ideal for long-term growth.

Want a Bit More Yield? Consider ZST

If you’re looking to squeeze out a little more return without taking on much more risk, consider ultra-short-term fixed income ETFs like the BMO Ultra Short-Term Bond ETF (ZST). ZST holds slightly longer-duration bonds and includes some corporate debt. That bumps up the yield by about 10-25 basis points above that of a money market ETF. That is expected because there is slightly more risk.

When we think about risk in fixed income, two main factors increase risk: duration and credit quality. So, for investors looking to put their cash to work while keeping their risk very low, an ultra-short-term fixed-income ETF like ZST can provide more yield by having slightly longer duration than a money market fund.

A longer duration increases risk because the money is lent for longer, and the bond’s attractiveness is relative to prevailing interest rates. For example, if interest rates rise, the coupon paid by your bond remains the same. You are stuck taking that lower interest payment until the bond matures, or you will have to accept a lower price if you sell the bond before then. For comparison, the weighted average duration of ZST was ~7.5 months. In contrast, ZMMK has an average term-to-maturity of under 3 months as part of its prospectus. Both ZMMK and ZST use government and high-quality corporately issued debt instruments.

So, while ZST is still low risk, it’s a step up from pure money-market exposure. Is an extra 3 to 4 months duration risk worth the 10-25 basis point yield increase? That depends on your comfort level.

Interest Can Be Taxing

GICs, money market ETFs, and fixed income ETFs all generate interest income, which is generally taxed at your full marginal rate. You may consider sheltering that income by holding it in tax-advantaged registered accounts, like TFSAs or RRSPs, to preserve more earnings. However, those are also your most valuable accounts to grow over time. That requires some higher-risk, higher-return investments.

Also, there are rules for withdrawing money from registered accounts. You would want to keep that in mind if your goal in holding cash is for an upcoming expense. Money can be withdrawn from a TFSA for any reason, but you don’t get that contribution room back until the following calendar year. An RRSP allows for temporary withdrawals through the Home Buyers Plan and Lifelong Learning Plan, but it is otherwise less flexible.

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Getting A Discount

In the past, when we wrote about ZST and its benefits, we highlighted that, in a rising-rate environment, the ETF became very overweight in discount bonds. Discount bonds are more favorable from a tax standpoint because a larger share of their return comes from partially taxed capital gains rather than fully taxed interest. We explained that this phenomenon was due to the rate environment and that it wouldn’t last forever. Now that rates have reversed course, we expect most of the discount bonds in ZST to roll out within the next 6 months.

For investors looking to add discount bonds to their investment accounts, the BMO Discount Bond ETF (ZDB) holds 100% of its assets in discount bonds. It represents an aggregate fixed income market exposure rather than a cash-equivalent play like ZST or ZMMK. The duration is longer, and it holds a mix of federal, provincial, and corporate bonds. If the weighted average duration of ZDB (7.48 years) is too risky for you, ZSDB also holds discount bonds with a shorter duration (2.78 years).¹

How GICs May Be Risky In The Long Run

When interest rates rose, and GICs were paying over 5%, people piled into them. The face value of the interest rate grabbed people’s attention, especially after years of very low interest rates. If you were holding cash for a short-term need, that was great luck. However, was chasing that interest rate-wise otherwise?

One thing that people forget is that interest rates rose because inflation rose. Even though you could get a 1-year GIC paying almost 6% in 2023, inflation was running about 4%. So, you may have grown your buying power by 2%. Not nearly as exciting as 6%. If that GIC were exposed to a 50% tax rate, you would have had 3% return – a 1% loss of buying power. Yuck. While unpredictable, and riskier, an all-equity ETF like ZEQT returned 25% in 2024.² Plus, that was mostly as capital gains on which you do not pay tax until you sell, and then at half the tax rate.

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Short-Term Fluctuation vs Long-Term Erosion

If your timeframe for needing the money is short and you cannot risk losing money, then a GIC or money market may be useful. However, over the long run, you risk losing buying power. Even retirees who want to preserve their capital should also consider preserving their buying power. The risk of inflation eroding buying power increases the longer the timeframe, for example, living another few decades.

Equity markets have historically had a better chance of outpacing inflation than fixed income over long time horizons. The longer the time period, the greater the difference. However, equity markets are very risky in the short term. So, ask yourself why you want to use a GIC or a cash equivalent, and whether that aligns with your risk profile and timeframe. Don’t just look at the pre-tax interest rate, which doesn’t account for inflation.

The Bottom Line

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Ask: Why Do I Need Cash?

There’s a place for cash in many people’s portfolios, whether it’s for a short-term goal like buying a home or going on vacation, or just adding insurance to a rainy-day fund. For those who bought GICs because of the interest rate and are reconsidering that when they mature – think of your time frame. Consider your risk profile and whether inflation or investment risk is the bigger threat over that time frame.

If you are thinking about moving that cash into equities for long-term growth, remember: timing the market is tough. Markets are highly efficient at pricing in all of the investment narratives that you may hear, and competition is fierce. Even the pros struggle with it (check out the SPIVA reports online for empirical proof). You can maximize your time frame by investing sooner, and you cannot predict which way the market will go in the near future. If you’re ready to invest for the long haul, consider diversified, low-fee ETFs — like asset allocation ETFs — that can help grow your money while managing risk by rebalancing for you.

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If You Need a Cash Reserve: What Suits Your Stability & Flexibility?

Don’t let your cash sleeve become a fearful investment. There are smart ways to stay safe and stay in the game. If you do need to park some cash, consider whether a GIC, a money market fund, or a short-term bond fund best suits your stability and flexibility needs.

ETF Market Insights Video on GICs

Footnotes & Disclaimer

¹As of Oct 31, 2025. ²Source: BMO ETFs comparison tool, November 2025. ZMMK’s historical returns: YTD 2.4%, 1 year 3.1%, 3 year 4.3 %.

One’s risk profile is comprised of risk tolerance (i.e., willingness to accept risk) and risk capacity (i.e., ability to endure potential financial loss).

Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).

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Disclaimer:

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