According to a story in The Globe and Mail, principal-protected notes (PPNs) are selling like hot cakes and Bay Street is doing what it does best: cranking out new products to meet the demand. I can’t understand investor enthusiasm for these products:
- They are complex. Try reading the prospectus for the TD Dividend Income Fund-Linked PPN mentioned in the Globe story. I have engineering textbooks that are easier to understand.
- Fees, fees and more fees will eat up the excess returns you could have earned from equities. The result: bond-like returns with stock-like certainty.
- Principal-protection isn’t all that is cracked to be. If inflation runs at 2%, you’ve lost 10% in purchasing power over 5 years. How is that a deal?
- The Globe article points out that the risks in the underlying investments are typically low. So, why pay for the principal protection?
If principal-protection is important to you but the certainty of returns is not, pick any asset class you find interesting and construct your own note using Four Pillars’ recipe.
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8 responses so far ↓
1 FourPillars // Oct 17, 2007 at 7:24 am
Thanks for doing this public service announcement - it’s ironic that investors who think they are being extra safe are just getting hosed.
Thanks for the link too..
Mike
2 Traciatim // Oct 17, 2007 at 9:57 am
So let me get this straight, the whole document basically describes:
1) You pay 5% up front to buy the fund
2) You pay 2.2% MER on the fund of the portion in equities
3) You pay 0.3% MER on the fund portion in bonds
4) You only buy bonds when the fund value goes below the principal value, and they only buy enough to make sure the bonds will make enough to cover your principal.
Did I get that correct?
I wonder if I should do a comparison between this and just using the TD E-Funds or some type of other low fee strategy.
3 Traciatim // Oct 17, 2007 at 10:00 am
Oh, and I forgot that if you sell in under 2 years there is an early redemption fee between 0.7% - 5.95% depending on how long your money was in there.
Plus, how the heck do you figure out your taxes at the end when you sell and you have capital gains and interest income from bonds over the course of the investment. It sounds like a big complicated mess to me.
4 Canadian Capitalist // Oct 17, 2007 at 11:00 am
Big complicated mess is a perfect description. But, hey the investor is guaranteed to get his $100 back!
5 Best of the Week - Oct 26, 2007 | Million Dollar Journey // Oct 26, 2007 at 3:31 am
[...] Canadian Capitalist tells us to "Say No to PPN's" [...]
6 Best of the Week - Oct 26, 2007 | Million Dollar Journey // Oct 26, 2007 at 3:31 am
[...] Canadian Capitalist tells us to "Say No to PPN's" [...]
7 Traciatim // Oct 26, 2007 at 12:23 pm
Do you think CIBC’s offerings are any better, they seem only to charge a fee of 3-4% for the initial transaction.
Info at http://www.cibcppn.com
8 Thicken My Wallet » Blog Archive » 5 Investment Products I Avoid // Feb 15, 2008 at 7:01 am
[...] of PPN range from saying no to PPNs to PPNs give you the worst of both worlds (and this from a member of the investment community). And [...]
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