Indexed CDs blend the ease of a traditional savings account with the rewards of owning an index fund. Offered by a growing number of banks and brokerages, indexed CDs are standard certificates of deposit tied to stock indexes instead of securities. In exchange for assuming greater risk, savers can sometimes enjoy yields of two to five times those of traditional CDs. 

Bringing Wall Street Stocks to Main Street

The best CD rates are often found in banks, not brokerages, which is why a variety of financial institutions have started to offer this hybrid investment product. In many cases, a financial advisor operating at a consumer bank can offer indexed CDs through a shared parent corporation or through a marketing agreement.

Indexed CDs offer casual investors an easier way to access the power of the stock market without having to open a brokerage account. Instead of owning shares in mutual funds or equities, savers can simply set up an indexed certificate of deposit at a participating local bank. The bank, in turn, sets a rate and a yield based on the returns charted by a specific index, such as the S&P 500 or the Russell 2000.

Accepting Market Risk in Return for Bigger Yields

Who has the best CD rates for this particular product is often determined by the indexes used to set interest rates. In bull markets, yields can be significant. In bear markets, investors might not see any return at all. However, indexed CDs may be more attractive than traditional stocks or mutual funds, for a few reasons:

• The FDIC insures account holders for the amount of the initial deposit, securing investors in the event of a bank or brokerage failure.
• In a down market, account holders can still cash out their original deposit on the CD's maturity date. During the same period, stocks or funds might have generated losses.
• Instead of requiring account holders to pay maintenance fees or transaction costs, banks can set earnings "caps." They generate profit by keeping any interest generated beyond the stated cap.

Investing for the Long Haul

Best bank CD rates for "indexed" accounts, therefore, tend to be linked to more volatile indexes. In addition, most banks offering this relatively new savings product penalize early withdrawals. As a result, most financial advisors recommend indexed CDs only for deposits that will not need to be accessed for any reason before their maturity.

While most CDs are offered with terms of three to twelve months, long-term investors can ladder CDs or reach for even higher yield by seeking longer terms. As part of a balanced savings portfolio, indexed CDs can help long-term savers stay in the black with higher CD rates.