I promised myself that I wouldn't do any more postings on structured products for at least a few weeks, but I can't resist this one.

The Financial Post had a small item on Monday about CIBC coming out with a new product. It's called the "CIBC Total Premium Yield Deposit Notes" (believe it or not, this name is a lot more punchy than most of these products). The article was written by Hugh Anderson and it was so amusing (to my sick mind) that I thought it was a spoof. But when I went to www.cibcppn.com I determined it wasn't.

How would you like your advisor to sell you a product that has these attributes?

  • The return on the note will be variable, but you are guaranteed to get your money back in 3 years.
  • Income (if any) will be paid out once a year based on the performance of 10 Canadian stocks
  • The annual return, however, can't be determined by simple math (i.e. how did this 10 stock portfolio do?), but is based on a formula that includes the following elements:
    • if a stock is up, it is deemed to have a 10% return, no matter how much it rises
    • if a stock is down, the decline is factored into the formula, but the loss is capped at 25%

As Mr. Anderson said in his piece, "the offering advertisement may leave the investor with the impression they are being offered 10% income a year with no risk." In fairness to CIBC, it does say that the return is variable, but the "up to 10%" is bolded for all to see.

In reality, the maximum return of 10% will only be realized if all the stocks are up for the year. To get a 10% annualized return over 3 years, all the stocks would have to be up every year. Simple math tells me that the return drops pretty quickly with every down stock. In the marketing piece, they lay out a "positive example", which yields 7.36% per annum over 3 years. In the example, the stocks are up 25 out of 30 times (10 stocks x 3 years) and the 5 negative events are only modest single-digit declines. That's a pretty positive scenario for the stocks. As you can see, there is almost no chance that this product can produce a 10% annualize return. You've got a better chance winning the lottery.

With principal-protected products, it used to be that the holder would forego a fixed yield in return for a chance to participate in the equity market. With this CIBC product and many others like it, the client is foregoing a fixed yield in exchange for a chance at achieving a slightly higher yield. I've never thought the former was a good value proposition. I think the latter is even worse.

As far as GICs go, the standard version with a guaranteed yield of 4.25% is looking pretty good about now!