Canadians, too good to be true. 300% more than the market.

[K-ice]

What am I missing?

https://www.cibcnotes.com/ScreensCA/DocumentDownload.aspx?DocumentTypeID=3&PublishStatusID=1&ProductID=1640&CultureID=1

Pros
Linked to 5 quite stable banks
Return potential 300% of the market. So a 20% return becomes 60%
WTF, I must be reading that wrong.

Cons
You "could" loose everything, but not likely.
There is a 2.75% commission. But that is less than 0.5% per year, right?
You can't touch your money for 5 years
$5000 is a large minimum

What am I missing?
I am tempted to put $5000 here for a while.

[powersuitrecall]

I think the key to determining if this is worthwhile is to compare it to owning the reference portfolio.

Illiquidity and up front commission aside, the note only considers the capital appreciation.  Since you own a note and not the actual shares, you miss out on the dividends.

Personally it doesn't tempt me.  VCN has good chunk of financials, and that's good enough for me.

[dandarc]

* Investors will not have any right to receive any dividends or other distributions on the Reference Shares included in the Reference
Portfolio. The average annual dividend yield of the Reference Shares included in the Reference Portfolio was approximately 4.10% for the
12 months ended August 10, 2015, which would represent aggregate dividends of approximately 20.50% over the term of the Notes,
assuming the dividend yield remains consistent and the dividends are not reinvested.

Pretty sure that's a big part of it.  You're only participating in the price gains.  And these stocks generally pay big dividends, so that's a big part of the return.

[K-ice]

Yep I found the dividend thing after posting.
They have been about 4-5% per year.

Regardless I called since I still liked the overall idea.

But you must have a Wood Gundy account to purchase.

[K-ice]

These are one of those things that help the rich get richer.

[J.Milly]

If you had a fairly large lump sum to throw in, why not just buy equal portions of each bank and profit from the dividend and actual price increase? I understand its selling point is basically tripling the price gain but as everyone says the dividends are super attractive on CAD bank stocks.

[Interest Compound]

These are one of those things that help the rich get richer.

If by "rich get richer" you're referring to the people selling you this crap, then yes, I'd agree.

As stated, you're only participating in the price return of the securities. This is a horribly bad idea when the securities have high dividends, since each dividend payment reduces the price of the stock by the same percentage of the dividend payment.

Let's see if we can come up with an equation for the breakeven point where you'll make just as much money with this instrument, vs simply buying the stocks, assuming dividends stay at 5%:

P*(X +1) + 0.28P = P*(3X + 1)

P: Original price
X: % price rise during 5 years

The left side is simply buying the stocks, and the right side is the "too good to be true" thing they're selling you. Let's take price at 100, and solve for X:

100X + 100 + 28 = 300X + 100
100X + 128 = 300X + 100
28 = 200X
28/200 = X
0.14 = X

So the breakeven point is 14%. The stock price needs to grow more than 14% for this deal to make sense, versus simply buying the stocks directly. Ok, let's look at a price chart with these 5 banks and see how well they did over the last 5 years, one of the most explosive stock markets in history, which is unlikely to repeat itself over the next 5 years:



Ouch. Does this still look like a good deal to you? Remember, if something sounds "too good to be true", it probably is.

[dandarc]

It is interesting how different the TSE returns of these stocks are compared to the NYSE.  Exchange rate maybe?

Last 5 years on TSE price appreciation look like (pulled these on Friday from Google Finance):
RY: 34.88%
BMO: 12.51%
TD: 38.05%
BNS: 10.12%
NA: 31.69%

[dandarc]

Also, buried in the full text of the offering document (not the marketing sheet), there was a statement that each note has an estimated value of $90.16 at issuance or something like that.  Wasn't clear how they came up with that number, but that was what they disclosed.  So you're paying $100 for something worth $90.16.  $2.50 goes to the selling agent and $7.34 to CIBC.  At least that's what they're expecting.

One of those "hide the high fees" in a confusing product that will likely give you a positive return deals.

ETA: By "positive return" I mean the note will likely pay out more than you put in.  But that doesn't mean you couldn't have done better elsewhere.

[Interest Compound]

Also, buried in the full text of the offering document (not the marketing sheet), there was a statement that each note has an estimated value of $90.16 at issuance or something like that.  Wasn't clear how they came up with that number, but that was what they disclosed.  So you're paying $100 for something worth $90.16.  $2.50 goes to the selling agent and $7.34 to CIBC.  At least that's what they're expecting.

One of those "hide the high fees" in a confusing product that will likely give you a positive return deals.

ETA: By "positive return" I mean the note will likely pay out more than you put in.  But that doesn't mean you couldn't have done better elsewhere.

Interesting, I didn't include the fees in my calculation above. So it's the equivalent of a 10.9% load? Paying $100 for something worth $90.16. $90.16 * 1.109 = $100. Yup. Let's add that:

P*(X +1) + 0.28P = ((1 - UpFrontFee)* P*(3X + 1))

P: Original price
X: % price rise during 5 years
UpFrontFee: 10.9%

The left side is simply buying the stocks, and the right side is the "too good to be true" thing they're selling you. Let's take price at 100, and solve for X:

100X + 100 + 28 = 0.891*100(3X + 1)
100X + 128 = 267X + 89.1
38.9 = 167X
38.9/167 = X
0.23 = X

So including fees, the breakeven point is 23%. If those stocks rise 23%, there was no benefit. If stocks rise below 23% you lost money with this deal. If stocks fall you lost money with this deal. The stock price needs to grow more than 23% for this deal to make sense, versus simply buying the stocks directly. Let's calculate what it looks like if those stocks are flat (X = 0):

P*(0 +1) + 0.28P = ((1 - UpFrontFee)* P*(3*0 + 1))

128 = 89.1

If those basket of stocks are flat you underperform by 44%. Not a good "investment" in my opinion.

[Interest Compound]

It is interesting how different the TSE returns of these stocks are compared to the NYSE.  Exchange rate maybe?

Last 5 years on TSE price appreciation look like (pulled these on Friday from Google Finance):
RY: 34.88%
BMO: 12.51%
TD: 38.05%
BNS: 10.12%
NA: 31.69%

Interesting, but even this only averages out to 25.45%, barely making the deal worth it over the last 5 years. K-ice, what do you think the chances are of the next 5 years looking as good as the last 5 years? If you really want to bet on such an outcome, there are much better ways to do it.

[dandarc]

Also, buried in the full text of the offering document (not the marketing sheet), there was a statement that each note has an estimated value of $90.16 at issuance or something like that.  Wasn't clear how they came up with that number, but that was what they disclosed.  So you're paying $100 for something worth $90.16.  $2.50 goes to the selling agent and $7.34 to CIBC.  At least that's what they're expecting.

One of those "hide the high fees" in a confusing product that will likely give you a positive return deals.

ETA: By "positive return" I mean the note will likely pay out more than you put in.  But that doesn't mean you couldn't have done better elsewhere.

Interesting, I didn't include the fees in my calculation above. So it's the equivalent of a 10.9% load? Paying $100 for something worth $90.16. $90.16 * 1.109 = $100. Yup. Let's add that:

P*(X +1) + 0.28P = ((1 - UpFrontFee)* P*(3X + 1))

P: Original price
X: % price rise during 5 years
UpFrontFee: 10.9%

The left side is simply buying the stocks, and the right side is the "too good to be true" thing they're selling you. Let's take price at 100, and solve for X:

100X + 100 + 28 = 0.891*100(3X + 1)
100X + 128 = 267X + 89.1
38.9 = 167X
38.9/167 = X
0.23 = X

So including fees, the breakeven point is 23%. If those stocks rise 23%, there was no benefit. If stocks rise below 23% you lost money with this deal. If stocks fall you lost money with this deal. The stock price needs to grow more than 23% for this deal to make sense, versus simply buying the stocks directly. Let's calculate what it looks like if those stocks are flat (X = 0):

P*(0 +1) + 0.28P = ((1 - UpFrontFee)* P*(3*0 + 1))

128 = 89.1

If those basket of stocks are flat you underperform by 44%. Not a good "investment" in my opinion.

It wasn't a fee - it was an 'estimate of current value'.  Everything I read indicated the payoff would be based on the full $100.  The $2.75 "consideration" is a commission to the agent.  So CIBC only nets $97.25, but seems to be paying out based on the full $100.

https://www.cibcnotes.com/ScreensCA/DocumentDownload.aspx?DocumentTypeID=1&PublishStatusID=1&ProductID=1640&CultureID=1

[lostamonkey]

If you want to buy canadian bank stocks, just buy canadian bank stocks. There is no point buying an expensive, confusing product.

[powersuitrecall]

I just noticed that CIBC is notably absent from the "reference portfolio".  Why would they do that?

[Kaspian]

What am I missing?

You are missing the word "Hypothetical", which is in there on the second page.  :/

I bought one of TD's sector-linked GICs (the one I got was for the banks) which hypothesized the same sort of returns.  ...I think after all was said and done I got about 4% a year or less.  It's a whole lotta meh.