XEQT vs Market-Linked GICs: Why “Principal Protected” Products Cost Canadians More Than They Think

A few years ago, I sat across from a bank advisor at one of the Big Five branches in downtown Toronto. I had some cash sitting in a savings account earning next to nothing, and I mentioned I wanted to get it into the market. She nodded, pulled up something on her screen, and slid a brochure across the desk.

“This is our market-linked GIC,” she said. “You get exposure to the stock market, but your principal is guaranteed. If the market goes down, you get all your money back. If it goes up, you participate in the gains. It’s the best of both worlds.”

I remember thinking: that sounds incredible. All the upside, none of the downside? Where do I sign?

But something felt off. I had been reading about XEQT and index investing, and I knew there was no such thing as a free lunch in finance. So I took the brochure home, read the fine print, and what I found made my jaw drop. The “participation rate” was 50%. The term was 5 years with zero liquidity. Dividends were not included. And there was a return cap of 25% over the entire 5-year period.

In plain English: if the stock market returned 60% over those 5 years, I would get 25%. If it returned 100%, I would still get 25%. And during those 5 years, I could not touch my money for any reason.

I politely declined and put the money into XEQT that afternoon. Let me explain why market-linked GICs are one of the most cleverly marketed – and ultimately disappointing – products Canadian banks sell, and why XEQT is far better for most investors.

1. What Are Market-Linked GICs?

A market-linked GIC (sometimes called an equity-linked GIC or principal-protected note) is a product offered by virtually every major Canadian bank. TD has them. RBC has them. BMO, Scotiabank, CIBC, National Bank – they all sell some version of this product.

Here is the basic pitch:

• You deposit a lump sum (usually $1,000 to $5,000 minimum) for a fixed term, typically 3 to 5 years.
• Your principal is guaranteed. At the end of the term, you will get back at least what you put in, even if the stock market crashes.
• Your return is “linked” to the performance of a stock market index – often the S&P/TSX 60, the S&P 500, or a basket of global indices.
• If the index goes up, you earn a return. If the index goes down or stays flat, you get your money back with zero return.

On the surface, this sounds like the perfect product for a nervous investor. You get to participate in stock market gains without the stomach-churning drops. Your money is protected by CDIC insurance (up to $100,000 per institution). You sleep well at night.

Banks love selling these. And every year, billions of dollars in Canadian savings flow into market-linked GICs instead of into investments that would actually build real, long-term wealth.

The reason is simple: market-linked GICs are enormously profitable for the bank and enormously costly for the investor. The costs are just hidden in ways most people never see.

2. The Pitch vs. The Reality

Let me lay out the marketing pitch and then show you what is actually happening behind the curtain.

The Pitch

“Get stock market returns with zero risk to your principal. Your money is 100% guaranteed.”

The Reality

Here are the catches that the glossy brochure does not make obvious:

• Participation rates of 50-80%. Most market-linked GICs only give you a fraction of the index’s return. If the participation rate is 60% and the market goes up 50% over the term, you earn 30%. The bank keeps the other 20% (plus what they earn from holding your capital). Some products have participation rates as low as 40%.

• Return caps that limit your upside. Many market-linked GICs cap your total return at a fixed ceiling – say, 20% or 30% over the entire term. If you are in a 5-year market-linked GIC with a 25% return cap and the market soars 80%, you still only get 25%. The bank profits enormously from that difference.

• No dividends, period. This is the killer. When the bank says your return is “linked” to the S&P/TSX 60 or S&P 500, they mean the price return only. Dividends are not included. For context, dividends have historically accounted for roughly 30-40% of total stock market returns over long periods. A market-linked GIC strips out one of the most powerful components of equity investing and keeps it for the bank.

• No compounding during the term. Your return is calculated based on the index level at the start and end of the term. Even if the market goes up 30% in year one, you do not benefit from compounding on those gains during years two through five. With XEQT, your returns compound continuously because you own the actual underlying assets.

• Zero liquidity for the entire term. Most market-linked GICs are completely locked in for 3 to 5 years. If you need the money for an emergency, a down payment, or a life change, you are stuck. Some banks will let you redeem early, but only at the guaranteed minimum value (your original principal), which means you forfeit all gains. With XEQT, you can sell on any trading day and have cash in your account within two business days.

• Averaging formulas that suppress returns. Some market-linked GICs average the index level over the final year rather than using the actual end-of-term value. This almost always results in a lower calculated return.

• Opportunity cost of locked capital. The money in a market-linked GIC is money not compounding in XEQT. Over 5 years, the difference between a capped, dividend-stripped return and the full total return of XEQT can be staggering.

When you add all of these up, you realize that “principal protection” is not free. You are paying for it – you are just paying in lost returns rather than a visible fee. And the price tag is far higher than most people realize.

3. XEQT vs. Market-Linked GIC: Feature Comparison

Let me put the two options side by side so you can see exactly what you are getting – and what you are giving up.

The effective cost line is the one that matters most. There is no line item on your bank statement that says “market-linked GIC fee: $3,200.” The bank structures the product so you receive a fraction of what you would have earned by simply buying the index yourself. The cost is invisible but very real.

4. The Numbers: What $10,000 Actually Becomes

Theory is nice, but let me show you real math. Below is a comparison of hypothetical outcomes for $10,000 invested in XEQT versus a market-linked GIC over various periods.

Assumptions for XEQT: 8.5% annualized total return (conservative long-term estimate for a global equity portfolio, inclusive of dividends).

Assumptions for Market-Linked GIC: 60% participation rate, no dividends, 30% return cap per 5-year term, renewed into a new market-linked GIC at each term’s end. This translates to roughly 3% annualized effective return after all restrictions – which is consistent with published analyses of actual market-linked GIC outcomes in Canada.

Read that last row again. Over 30 years, the same $10,000 becomes $115,583 in XEQT versus $24,273 in market-linked GICs. That is nearly five times the money. And this is using conservative assumptions for XEQT and relatively generous assumptions for the GIC.

The difference comes down to three things: dividends (which the GIC excludes), compounding (which the GIC prevents during the term), and full market participation (which the GIC caps). Each one of these costs you. Together, they are devastating.

Now imagine this is not $10,000 but $100,000 – a common amount for someone rolling over savings or an inheritance. Over 25 years, the difference is $559,230. That is more than half a million dollars left on the table for the privilege of “principal protection.”

5. Why Banks Push Market-Linked GICs So Hard

If market-linked GICs are such a bad deal for investors, why do the banks sell them so aggressively?

Because they are an incredibly good deal for the bank.

Here is the simplified version of what happens behind the scenes:

1. The bank takes your $10,000 deposit. They are obligated to return at least that much at maturity.
2. They invest roughly $8,500 in a zero-coupon bond that will mature to $10,000 in 5 years. That bond guarantees your principal.
3. They use the remaining ~$1,500 to buy cheap call options on the linked index, structured with participation rates and caps to keep the cost low.
4. The bank pockets the spread – plus the dividends from the index (which they keep) and interest earned above the zero-coupon bond cost.

Analysts have estimated that the effective annual cost to the investor is between 3% and 5% when you account for everything you are giving up. That is comparable to the most expensive mutual funds in Canada.

The marketing is brilliant. Instead of saying “we charge a 4% annual fee,” they say “your principal is guaranteed and there are no fees.” Technically true. But only one version tells the real story.

6. Who Market-Linked GICs Might Actually Suit

I want to be fair. There is a small subset of investors for whom a market-linked GIC is not a terrible choice. If you fall into one of these categories, a market-linked GIC might make sense for a portion of your savings:

• You absolutely, positively cannot lose a single dollar. Maybe you have a house down payment due in 3 years and you would be devastated if the market dropped 20% right before closing. A market-linked GIC guarantees your principal. XEQT does not – over short periods, you can and will experience losses.

• You have an extremely short time horizon (under 3 years). If you need the money in 1-3 years for a specific, non-negotiable expense, the risk of equity market volatility is real. A market-linked GIC gives you some upside potential without the downside. (Though a high-interest savings account or a regular GIC might be a simpler and more liquid option.)

• You are psychologically unable to handle any portfolio decline. If you know you would panic-sell XEQT during a 30% correction, a market-linked GIC might be better than staying in cash permanently.

• You are very close to retirement and need certainty for a specific slice of money. A retiree who needs a predictable income floor in the next 3-5 years might use a market-linked GIC for that portion, while keeping the rest in XEQT for long-term growth.

But notice the pattern: these are all edge cases involving very short time horizons, very small risk tolerance, or very specific life circumstances. For the vast majority of Canadians investing for retirement, a child’s education, or long-term wealth building, market-linked GICs are a terrible use of capital.

7. Why XEQT Is Better for Most Canadians

If you have a time horizon of 5 years or more – and most investors do – XEQT is a superior choice in nearly every dimension. Here is why.

You get 100% of market returns, not 50-80%

When you own XEQT, you own a piece of over 9,000 companies in 49 countries. When those companies grow, you get all of the growth. There is no participation rate skimming off a chunk of your returns. There is no return cap limiting your upside in strong markets. You get the full ride.

You keep the dividends

XEQT holds stocks that pay dividends. Those dividends flow through to you as quarterly distributions. Over long periods, dividends contribute significantly to total returns through reinvestment and compounding. Market-linked GICs strip dividends out entirely and keep them for the bank.

Your returns compound continuously

With XEQT, last year’s gains generate this year’s gains, which generate next year’s gains. Compounding is the most powerful force in investing, and it works 24/7 inside your XEQT holdings. Market-linked GICs break the compounding chain by locking in a single, capped return at the end of a 3 to 5-year term.

You have complete liquidity

Life is unpredictable. With XEQT, you can sell some or all of your position on any trading day. You are not locked in for years. This flexibility has real value – it means you can rebalance, withdraw for emergencies, or adjust your strategy whenever you need to.

The fees are transparent and tiny

XEQT charges a management expense ratio of 0.20% per year. That is about $20 per year on a $10,000 investment. You know exactly what you are paying, and it is a fraction of the hidden costs embedded in a market-linked GIC.

You can hold it in any registered account

XEQT works beautifully in a TFSA, RRSP, RESP, or taxable account. The tax treatment is straightforward, and the benefits of tax-free compounding in a TFSA are enormous. A market-linked GIC technically works in these accounts too, but you are compounding a much smaller return, so the tax shelter is less valuable.

Historical evidence is overwhelmingly on your side

The global stock market has returned approximately 8-10% per year over the long term, including dividends. Market-linked GICs have delivered roughly 2-4% annualized after all their restrictions. Over any 10+ year period, the probability of XEQT outperforming a market-linked GIC is extremely high – approaching certainty over 15 and 20-year windows.

8. But What About the Risk?

The one legitimate advantage of a market-linked GIC is the principal guarantee. If you invest $10,000 and the market crashes 40%, you still get $10,000 back at maturity. With XEQT, your portfolio would temporarily show $6,000.

But here is the thing most people miss: the principal guarantee only matters if you would panic-sell during a downturn.

If you are investing in XEQT with a 10+ year time horizon, short-term declines are not a risk – they are when you get to buy more shares at lower prices. Every major decline in history – the 2008 financial crisis, the 2020 pandemic crash, the 2022 bear market – was followed by a recovery to new highs.

The irony: by choosing a market-linked GIC to avoid short-term volatility, you are guaranteeing a much worse long-term outcome. You are trading temporary discomfort for permanent underperformance. It is like buying flood insurance for a house on top of a mountain – you are paying for protection you do not need.

9. What to Do If You Already Own a Market-Linked GIC

If you are reading this and realizing you already have money locked in a market-linked GIC, do not panic. Here is what I would suggest:

• If your GIC is close to maturity (less than 12 months away), wait it out. When it matures, take the proceeds and invest them in XEQT through a low-cost platform like Wealthsimple.

• If your GIC has years left, check the early redemption terms. Some banks will return your principal (without any gains) if you redeem early. If the opportunity cost of staying locked in is large – say, the GIC has 3+ years remaining and you have a long investing horizon – it might be worth redeeming at par and redeploying into XEQT immediately.

• Going forward, redirect all new savings to XEQT instead of market-linked GICs. Set up automatic contributions on a platform that lets you buy XEQT commission-free. The sooner your money starts compounding at full market returns, the better.

Do not beat yourself up over past decisions. The important thing is that you understand the trade-offs now and can make better choices going forward.

10. The Bottom Line

Market-linked GICs are one of the most brilliant marketing creations in Canadian retail banking. They take a fundamentally bad deal for the investor – capped returns, no dividends, no compounding, no liquidity – and package it as a “safe” alternative to the stock market. The principal guarantee is the shiny object that distracts you from everything you are giving up.

For the small number of investors who genuinely cannot handle any temporary loss and have very short time horizons, market-linked GICs serve a purpose. But for the vast majority of Canadians with 5+ years until they need their money, XEQT is a dramatically better option.

With XEQT, you get full market returns, full dividend payments, continuous compounding, daily liquidity, global diversification across 9,000+ stocks, and total fee transparency at 0.20% per year. You give up the principal guarantee – but over any reasonable long-term horizon, you are overwhelmingly likely to come out far, far ahead.

The next time a bank advisor slides a market-linked GIC brochure across the desk, you will know exactly what to say: “No thanks. I own XEQT.”

Market-linked GIC terms and conditions vary by institution. The participation rates, return caps, and terms described in this article are representative examples based on publicly available product sheets from major Canadian banks as of 2026. Always read the specific terms of any GIC before investing. XEQT’s historical returns are based on the performance of its underlying indices and are not guaranteed. This article is for educational purposes and is not financial advice. Past performance does not guarantee future results.