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:

  1. 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.
  2. 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.
  3. 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?
  4. 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.