Market-Linked CD’s – Your opinions?

[CuriousJoe]

Folks:
I am an EXTREMELY conservative investor nearing retirement. I have rolled over 250k from a 401K account to my IRA and looking to ‘invest’ the IRA proceeds. My initial thought was to put this in a bank CD and not in the market. However I was told that a 7 year Market-Linked CD may be a better option.

Pros:
250k FDIC insurance, protecting the principal, similar to bank CD
Slightly better yield than bank CD’s
Cons:
Capped on the market potential

I don’t need to withdraw the funds for RMD, as I have other IRA’s that I can tap into.
Appreciate your opinions.

[OAG]

Do some research - Google is your friend. Personally a quick check (read a couple of atricles) tells me to stay far away. However, you may disagree.

[CuriousJoe]

Thank you OAG.

Based on may 'research' for a conservative investor there is no downside compared to traditional bank CD's which are offering almost nothing in terms of returns. On the upside, Linked CD participate in the market, though 'capped' on the return.

Linked CD's are FDIC insured. However, I also read the following:

Issuer Default Risk:
MLCDs are unsecured obligations of the issuer and therefore subject to default risk. If the issuer defaults on its obligation, investors will receive significantly less than the principal amount of the structured investment, even if the product is principal-protected.

Not sure what this means..

[skepticalobserver]

Do I hear “structured product?” Yes, I think so. In this regard, an exhaustive 2013 math-heavy study by SLCG (“Structured Certificates of Deposits”), https://www.slcg.com/pdf/workingpapers/ ... eposit.pdf. Cutting to the chase:

Our primary findings are that (1) structured CDs include payoffs to complex derivative positions; (2) structured CDs are worth significantly less than their issue price; (3) this mispricing is present across product types and issuers; (4) the crediting formulas in structured CDs have a high probability of crediting the minimum return; and (5) the death put can be of positive or negative value to the investor depending on product features and type. Each of these factors contribute to significant complexity in valuing these products. We find that most of the apparent benefits of structured CDs are illusory and overwhelmed by their inherent risks and embedded fees.

The SEC, “Equity-Linked CDs, is more circumspect, https://www.sec.gov/fast-answers/answer ... dshtm.html

In the alternative think about this: buy a Treasury zero (or a regular higher yielding CD discounted to face value) and use delta between the discounted price and par value and buy the S&P index. If the index tanks at least you get par on the Treasury at maturity.

[Stinky]

Two word opinion -

Run away!

[MikeZ]

My uneducated understanding is basically they just buy options on the S&P 500 to make it 'market linked' So I guess you could just do the same thing sans getting it in a CD product.

[CuriousJoe]

In the alternative think about this: buy a Treasury zero (or a regular higher yielding CD discounted to face value) and use delta between the discounted price and par value and buy the S&P index. If the index tanks at least you get par on the Treasury at maturity.

Not sue if I can do this within an IRA. Thanks for the suggestion.

[CuriousJoe]

Two word opinion -

Run away!

Any particular reason?

I MAY get a better rate than a traditional bank CD. At worst, I get my principal back because of FDIC coverage. I don't plan on redeeming it before maturity - so no penalty.

[ikowik]

Two word opinion -

Run away!

Any particular reason?

I MAY get a better rate than a traditional bank CD. At worst, I get my principal back because of FDIC coverage. I don't plan on redeeming it before maturity - so no penalty.

These are extremely complex products (think structured = structured to be complex and opaque)and nearly impossible for an average investor to understand. Hidden costs and caps on what one can get. Try reading the paper quoted by skepticalobserver above. The conclusions are clear.

[Stinky]

Two word opinion -

Run away!

Any particular reason?

I MAY get a better rate than a traditional bank CD. At worst, I get my principal back because of FDIC coverage. I don't plan on redeeming it before maturity - so no penalty.

The best one-sentence explanation about why to run away is quoted from above.

We find that most of the apparent benefits of structured CDs are illusory and overwhelmed by their inherent risks and embedded fees.

[sycamore]

I hadn't heard of market-linked CDs until recently. There's a bogleheads wiki article on them that's worth reading. And here's some helpful info from the FDIC: https://www.fdic.gov/consumers/consumer ... edcds.html

Maybe there are some people in some circumstances where a market-linked CD is helpful. It's a hybrid investment. I wouldn't invest in them; it makes more sense to buy just enough in stocks that I'm comfortable with and put the rest in CDs, cash-like vehicles, or bonds.

[Rob5TCP]

Been there, done that, a long time ago. Tried several time and one of the CD's did quite well.
Most I got back what I put in. One "CD" even had charges from the holding company so I ended up with
2% less than what I put in after SEVEN YEARS. That was a number of years ago before I discovered
Vanguard and also the last one I bought. This was brokered and not from a bank and the brokerage
charge an annual fee plus a termination fee. Wonderful.

If your getting directly from the bank, read all the gotchas. Unlimited downward potential with very
limited upside. You never get any of the dividends so those are "lost". Under just the right circumstances
you will come out ahead of any regular CD. The 250 page details "manual" must show you all the gotchas.

[CuriousJoe]

Thank you all.
Agree, Market Linked CD's are some what complex to understand. So, I decided to just put the amount in a bank CD yielding 0.4% !!!

[willthrill81]

Thank you all.
Agree, Market Linked CD's are some what complex to understand. So, I decided to just put the amount in a bank CD yielding 0.4% !!!

Why such a low CD yield? You can get a 12 month CD from Ally paying 1.1%.

[CuriousJoe]

I already rolled over the amount to Sterling National. That is their best rate !!

[skepticalobserver]

So, I decided to just put the amount in a bank CD yielding 0.4%

Not so much of return on principal as return of principal.