Came across this today in a prospects account. Some FDIC CD linked to an index or some stocks?Anyone use these?
Yup, real easy sell to a client who wouldn’t be in the market regardless. Generally speaking, they have some kind of minimum rate of return so no matter what, they will get that. Some time it’s just principal protected only but the value is linked to an index or basket of securities.Just sold one the other day: 5 year CD, holding period rate of return of 12% (2.4 annually), linked to the Dow for the upside at was capped at around 15% or so, don't remember specifically. This isn't for everybody but if an individual wants guarantees and especially with the media spouting FDIC, it's an easy sell. Minimum rate of return, FDIC insured, index does well you make more money. Downside is they have to hold them to maturity, very limited secondary market if they wanted to get out before maturity. Kind of like an equity indexed annuity but with the FDIC insurance.
Forgot to say that they trade like bonds. Each one is individually tailored, so you have to read the offer sheet to get specifics.
Last reply on this:Here's some information on a new issue that came out, straight from the term sheet (prospectus):
This is a principal protected product meaning an investor who holds the Index Linked CD ("ILC") to maturity will not receive less than the principal amount of the ILC outstanding on the maturity date. During the first three years of this ILC, investors will be paid annual fixed interest payments at a rate of 3.50% per annum (3.50% annual percentage yield). During the final two years of this ILC, investors may receive an annual contingent interest payment, depending upon the performance of the S&P 500 Index (the "Index"), which will be determined as follows:If the closing level of the Index on the related observation date is equal to or above the initial closing level of the Index, the contingent interest payment will equal at least 5.50% per annum (5.50% annual percentage yield) multiplied by the outstanding principal amount. If the closing level of the Index on the related observation date is less than the initial closing level of the Index, no contingent interest payment will be made.
i just did one, issued by Wells Fargo. FDIC insured, linked to a commodity index. 5.5 years, worst case scenario, get your prinicpal back, best case, 100% participation in the index increase, to a max of 65% return.They sort of trade like bonds, but worse. They immediately show at 97 on the statement due to sales charge. And then they dont really trade true until about a year prior to maturity. I felt this was a good way for conservative investors to get exposure to an alternative asset class without the risk. The risk is really the Opportunity cost, which is about 3% in a 5 year FDIC insured CD
Many different permutations. But the basics are CD/FDIC wrapper to guarantee return of principle, investment performance is tied to one or more indexes, usually some kind of cap in place to limit total return in exchange for the guarantee of principle. Some offer a minimum yearly return and a lower cap total return, some offer no min return, but a higher cap total return. Many different issuers.I have also done the Wells Fargo Commodity Linked CD, and before that, their Equity Linked CD. Basics of Equity Linked CD are 5.5y maturity with full return of principle at maturity. Investments were tied to a 50/50 basket of S&P 500 and EAFA indices, with a total return cap of 50%. I positioned it as a way to get market exposure, without fear of losing your investment. If the return was capped out, you received a 9% return per year, or the approximate long term return of the stock market, along with downside protection. I would characterize liquidity as limited....you should expect to stay in for 5y. If you need your money back early, you may not get your full investment returned and would essentially pay a fee to get to your money. CD, Annuity and "B share" buyers undstand early withdrawl fees.
You had also better understand the tax regs regarding linked CDs. They are an easy sell for an IRA, but in a taxable account they are subject to phantom tax regardless of which direction the market takes.
[quote=KensLoveChild]You had also better understand the tax regs
regarding linked CDs. They are an easy sell for an IRA, but in a
taxable account they are subject to phantom tax regardless of which
direction the market takes.
Good point. If it’s in a non retirement account, you will get 1099’s
at the end of the year just like a regular CD at the bank. Still a
pretty good sell for someone who’s not concerned about opportunity cost
and want market exposure.