Market Indexed CDs have become very popular in the last few years. This is not a surprise given the relatively low standard CD interest rates being offered by banks, the growing popularity of indexed annuities and the instability of the market. At the end of the day, what does an indexed CD really offer?
Market linked CDs all work in a similar manner.
- Guaranteed return of principal if you hold them through the maturity date
- A variety of crediting methods
- Most use a cap on your annual return and a floor of a 0% return
- Most use a bucket of 10 to 15 stocks to determine the annual point to point gain or loss
- Most provide the capped return if the stock’s return is either no change or possitive for the year.
The crediting methods vary but the general concept remains the same…. Guaranteed principal with no risk to the primary investment. Market indexed CDs do promote that they do not have a surrender charge but they are subject to a Market Value Adjustment which can essentially have the same result.
Do Market value CDs present an upgrade over Market Indexed Annuities? I think it is safe to say that the answer to this questions is “yes”. While most of them do not have an annual reset which is a definite negative, they do have much higher annual caps and over the years it has been proven that the annual point to point crediting method yields the best return.
The offers on Market linked CDs change every month and there are relatively good deals to be had if you are willing to wait for someone to make a good offer. At the least, this offers a safe money option that should certainly out pace traditional fixed interest CDs