Is an 'unconventional' CD for you?
September 03, 2013
If you're like many investors, today's low-interest-rate environment may have you scrambling for ways to boost your yields without increasing your risks too drastically. With rates on ordinary certificates of deposit (CDs) remaining very low, so-called unconventional CDs may offer a worthwhile alternative -- provided you read the fine print carefully.
Two of the most common unconventional CDs are raise-your-rate CDs and indexed CDs. Because the appropriateness of any such product comes down to how well its terms suit your situation, the merits of these accounts are not always easy to evaluate.
Here are some of the things you should consider when looking at these types of CDs.
Raise-your-rate CDs give you a limited number of chances to raise your rate over the CD's term. At a time when rates are especially low, there is an understandable appeal to these products. To gauge whether a raise-your-rate CD is a sensible investment, you should measure how much of a return you will give up if rates don't rise, because such products may start out with a lower rate than comparable conventional products.
Also, since interest rates tend to rise incrementally rather than all at once, a limited window for raising your rate may have less value than it seems. Deciding when to raise your rate may involve making a tough call on what's going to happen next with interest rates.
Indexed CDs don't offer a conventional, fixed rate of interest, but instead tie their return to the performance of a more volatile financial vehicle, such as a specific stock market. The FDIC cautions that when making these types of investments, depositors should check that the principal is fully guaranteed and FDIC insured.
If that is the case, essentially what you are putting at risk is the interest you could earn on a conventional CD -- and in today's low-yield environment, the amount at risk is less than it would be in more normal circumstances.
A fresh twist
EverBank recently released an indexed CD with a new spin. The EverBank MarketSafe Evolving Economies CD is a five-year product that ties its return to the performance of four currencies: the Mexican peso, the Indian rupee, the Turkish lira and the Colombian peso. Unlike other types of CDs that deal in foreign currency, this account is FDIC-insured.
If those currencies outperform the U.S. dollar, the depositor's return is based on that performance. If they underperform the U.S. dollar, the depositor gets no return. Since this CD has a five-year term, the depositor is essentially betting five years of CD interest that those currencies will outperform the dollar over that time period.
As a practical matter, it would be unlikely that you could get exposure to those currencies efficiently for as little as EverBank's $1,500 minimum deposit for this product. So this type of CD may be intriguing to anyone who wants low-cost exposure to some potentially dynamic currencies.
Still, you should understand that currency performance is based on a complex mix of economic growth, monetary policy, political stability and rule of law. There can be an upside to making these investments, but a product like this should not be part of a conventional income-generating strategy because of the uncertainty of its return.
In any case, if you're interested in this CD, you should probably check into it soon -- EverBank says this offer will only last until September 11, 2013.