Q: RE: Jeff's question of Sep 22 "They (PPNs) can be replicated....but.....using a combination of an ETF and a bond could still result in a decline of total principal at the wrong time."
It is not my intention to be disagreeable at all and I stand ready to be corrected if I have misconceptions about Hank C's idea but here is a real life example of Hank's Gambit:
On June 21, 2009 I purchased a $24000 Government of Canada Strip Bond maturing December 1, 2015 in my wife's RRSP for $20051 (includes commission estimated at $200) with an annual yield just over 3% which is being held to maturity. About the same time in her cash account I purchased $3600 worth of COW units plus a $10 commission. Although we have since moved around the $878 profit from the sale of COW, I believe her principal of $20050 is still not subject to any kind of decline (present value $23281) so long as the Canadian Govt continues to print banknotes AND I sheltered her interest in a tax sheltered account AND capital gains and dividends in her cash account have been tax preferred AND I knew roughly what fees were paid to set this up AND funds have not been locked in. I believe this approach is superior and safer than any structured product available in Canada including Index Linked GICs and PPNs.
It is my understanding that PPNs are 1) Not covered by CDIC and therefore guaranteed by the institution only, which is an inferior guarantee to Cdn Govt, and 2) any gains made on maturity are fully taxable as interest, so even if you have stock market gains which are capped in the contract, you will pay tax at the highest rate and 3) the capped gains are tied to the performance of the TSX 60 or other benchmark so if you have a loss or are flat all you will see is their very low "guaranteed"rate or worse, just your principal after years of investment and hope and 4) you will never see the true hidden fees disclosed in the contract and 5) funds are probably locked in till maturity or there is a high fee to escape. I have never purchased one of these PPNs though when the Bank puts on an ad campaign for them they look tempting to be sure, so my assumptions could be all hogwash. There is a 10 year old CMS article by Jim Yih which estimates undisclosed fees on PPNs to run from 2% to 12%, seems to me a case of buyer beware!
Please let me know where my ideas might have gone wrong as my wife will surely have my scalp if I lose anything of hers!
Also I have never met Hank Cunningham though I did see him speak once at the Canadian Moneyshow.
Thanks, J.
It is not my intention to be disagreeable at all and I stand ready to be corrected if I have misconceptions about Hank C's idea but here is a real life example of Hank's Gambit:
On June 21, 2009 I purchased a $24000 Government of Canada Strip Bond maturing December 1, 2015 in my wife's RRSP for $20051 (includes commission estimated at $200) with an annual yield just over 3% which is being held to maturity. About the same time in her cash account I purchased $3600 worth of COW units plus a $10 commission. Although we have since moved around the $878 profit from the sale of COW, I believe her principal of $20050 is still not subject to any kind of decline (present value $23281) so long as the Canadian Govt continues to print banknotes AND I sheltered her interest in a tax sheltered account AND capital gains and dividends in her cash account have been tax preferred AND I knew roughly what fees were paid to set this up AND funds have not been locked in. I believe this approach is superior and safer than any structured product available in Canada including Index Linked GICs and PPNs.
It is my understanding that PPNs are 1) Not covered by CDIC and therefore guaranteed by the institution only, which is an inferior guarantee to Cdn Govt, and 2) any gains made on maturity are fully taxable as interest, so even if you have stock market gains which are capped in the contract, you will pay tax at the highest rate and 3) the capped gains are tied to the performance of the TSX 60 or other benchmark so if you have a loss or are flat all you will see is their very low "guaranteed"rate or worse, just your principal after years of investment and hope and 4) you will never see the true hidden fees disclosed in the contract and 5) funds are probably locked in till maturity or there is a high fee to escape. I have never purchased one of these PPNs though when the Bank puts on an ad campaign for them they look tempting to be sure, so my assumptions could be all hogwash. There is a 10 year old CMS article by Jim Yih which estimates undisclosed fees on PPNs to run from 2% to 12%, seems to me a case of buyer beware!
Please let me know where my ideas might have gone wrong as my wife will surely have my scalp if I lose anything of hers!
Also I have never met Hank Cunningham though I did see him speak once at the Canadian Moneyshow.
Thanks, J.
