What is a GIC laddering strategy?

If you’re in the market for a low-risk investment with a guaranteed return, a guaranteed investment certificate (GIC) may be a good place to start. Like bonds, GICs offer long-term stability and guaranteed interest rates, allowing you to build your portfolio over time.

While many Canadians have become familiar with GICs, not everyone is aware of the various portfolio strategies you can use. One such strategy, called laddering, allows you to maximize the return of your GICs without having to lock away all of your money into one long-term investment.

How does GIC laddering work?

GIC laddering means dividing your total investment amount into multiple investments, each of which matures one year after another. Staggering GIC terms frees up some of your money each year.

If rates rise, you can reinvest and earn more than your original rate. If rates fall, you’ll have peace of mind from knowing that most of your investment is still locked into a higher rate.

Set up a GIC ladder by dividing your total investment amount by the number of years you want to invest. Then allocate those smaller amounts to individual GIC investments with progressively longer terms.

GIC laddering example

Say you have $10,000 you want to invest for a maximum term of five years. You could invest in five $2,000 GICs that mature in one, two, three, four and five years, respectively. When each term matures, reinvest the new amount (your original investment plus the return) in a five-year term. Repeat this process over and over again to maximize your portfolio’s returns.

Related: Learn more about GICs in Canada

What are the benefits of GIC laddering?

The rationale for employing a GIC ladder schedule is simple: Your annual return will be much higher than if you invest your money in consecutive short-term GICs. By investing in various terms at the same time, you’ll earn higher interest rates every year. Combine that with reinvesting at maturity into a new lengthy term, and the laddering process yields significant returns over time.

To get a sense of how much interest you could earn in a laddered GIC portfolio, simply add up all of the interest rates in your portfolio and then divide it by the number of investments you made. You’ll find that this average interest rate is higher than what you could earn by investing in short-term GICs.

Investment amount	Term	Sample Interest rate
2,000	1 year	1.75%
2,000	2 years	2.00%
2,000	3 years	2.25%
2,000	4 years	2.50%
2,000	5 years	2.75%

That’s 11.25% in total interest. If you divide that by five (the number of investments you made), your average interest rate in the first year is 2.25%. Compare that with the interest rate on a one-year GIC and you’ll quickly see why laddering is more advantageous.

Drawbacks of a laddered GIC

GICs have a few drawbacks you should carefully weigh before investing:

• Interest rates. GICs are valued for being low-risk, stable investments, but their potential to rise in value diminishes when interest rates fall (as they are now).
• Can’t keep up with inflation. With interest rates so low, even laddered GICs are struggling to keep up with inflation.
• Early redemption. Selling your GICs before maturity can result in a significant penalty.

Alternatives to GIC laddering

If you want to earn fixed interest on your money without running a high risk of loss, GICs aren’t your only option.

How to compare laddered GICs

You can compare laddered GICs based on a number of different features:

• Fixed or variable rate. Most GICs offer fixed interest rates, although market-linked products are based on how well the stock market is performing.
• Interest rate. If you’re investing in fixed GICs, interest rates may differ across issuers. The most familiar issuers in Canada are the Big Five banks: RBC, TD, Scotiabank, BMO and CIBC.
• Minimum investment. Most GICs carry an initial investment minimum of $500, but this may vary across issuers.
• Renewal process. A key component of a GIC ladder is reinvesting your money on maturity. Some GICs do this for you automatically, while others need to be cashed out or reinvested into a different product.
• Payment frequency. GICs pay interest at different intervals, the most common being monthly, quarterly, biannually and annually.

Related: Guide to investing for the future

GIC laddering FAQs

• Is GIC laddering a good idea?

  When using a GIC ladder, your annual return will be higher than if you simply invest your money in multiple short-term GICs.

  Compared to locking up your entire investment in a single, long-term GIC, GIC laddering lets you access some of your funds each year. If rates rise during the year, you can reinvest at a higher rate. If rates fall, most of your investment is still locked into a more favourable rate.

• If I ladder my GICs, how much of my money can I access each year?

  A laddered GIC gives you access to 20% of your investments each year – that is, if you made five investments with terms ranging from one to five years. When that year's GIC reaches maturity, you can either reinvest the amount or take the money out.

• Can I use variable-rate GICs in my laddering strategy?

  A laddered strategy doesn't preclude you from investing in variable-return GICs, but it is generally intended for fixed-interest GICs. That's because a laddered GIC is meant to provide you with predictable investment streams without compromising liquidity when you need it.