With the TSX Index up almost 30% last year, sticking with stocks has been a much smarter idea than playing it safe. Of course, no one knows what the TSX Index will do in 2026. A warm 2025 could certainly be followed by a frigid 2026, a year that could well produce negative returns – something that is not possible with a GIC.
If you have an extremely long-term horizon, the call of the stock markets is hard to ignore, especially in an environment where you’d be lucky to score an interest rate well above 3% at a bank.
Of course, special GIC rates exist, and while a 3.0-3.5% term might make sense, especially if you already have more than your fair share of equity exposure, I think younger investors might want to consider the full extent of the opportunity cost of playing it too safe in this lower interest rate environment.
Beyond GICs: taking more risk for more reward?
The stakes undoubtedly seem higher when GICs are yielding much less than 4% while the stock markets are still hot. And while the TSX Index still seems like a great place to invest, those 10% corrections (or worse) are still going to happen.
As such, it’s important to know what you stand to lose on the way down when the tide finally turns and what the risks are of losing money if you’re more likely to panic when things get a lot tougher. Even if most feel good about the markets after strong returns in 2025, it’s important to remember that corrections happen almost every year on average.
And chances are you’re going to have to deal with it, perhaps at a time when you least expect it, on a range of issues that may not even be on your radar yet! It’s wise to play it safe with some of your portfolio (whether it’s cash or GICs), even if you’re not getting the best returns in the world. If you don’t take risks, you can expect the rewards to be quite moderate. Be that as it may, inflation has come down quite a bit, and since the trend still remains lower, GIC interest rates may not be so bad when you look at “real returns,” or returns adjusted for inflation.
Currently, such real returns could be between 0% and 1% if inflation remains subdued. But as food and shelter inflation has turned a bit higher, the inflation bite could be worse than the nominal rate (the CPI rate). Anyway, this piece will look at a risky, but rich, monthly income exchange-traded fund (ETF) that I would be willing to hold alongside GICs.
A great bond ETF worth buying
Think of shares of iShares Core Canadian Government Bond Index ETF (TSX: The XGB stands out as a safer bond fund than most other composite bond funds that have a large portion of exposure to corporate bonds.
While even government bond funds are not risk free (they can get choppy at times), I would say that the risk/return is quite balanced and GIC-heavy investors can do well, especially if rates continue to fall. If you expect lower interest rates and less credit risk than your average bond fund, it’s hard to beat the XGB ETF. It’s cheap, has lower volatility and could be a good middle ground for investors looking beyond GICs.
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