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Currency-linked CDs: too good to be true?

By Sheyna Steiner · Bankrate.com
Wednesday, July 28, 2010
Posted: 10 am ET

I've written about indexed CDs previously but recently a marketing e-mail for a currency-linked CD got me interested in writing about them again.

EverBank offers a few currency options in CD form. Their newest CD offering is linked to the Deutsche Bank Currency Returns Index. According to the details, investors can earn all of the upside of the index but none of the downside.

While the upside could be good, the CDs are mind-bogglingly complicated. Particularly for funds that would otherwise go into a plain-vanilla CD. I would think that many people attracted to hybrid CDs are CD investors frustrated with years of low yields.

Another drawback is that with a maturity of four years, investors run the risk of getting no return on their investment. Four years is a long time to hold a CD investment while receiving nothing for it.

However, your principal is protected so you do at least get back what you started with, despite the risk of tying up your money for several years.  

And your money will be tied up as early withdrawals are strongly frowned upon.

From the terms and conditions:

Except in the event of death or adjudication of incompetence of the holder of the MarketSafe CD, you may not withdraw any part of the CD prior to maturity. YOU SHOULD NOT DEPOSIT YOUR MONEY IN A MARKETSAFE CD IF YOU DO NOT HAVE THE INTENT AND THE ABILITY TO KEEP THIS PRODUCT FOR ITS FULL TERM.

(Emphasis theirs.)

The other currency CDs offered are covered in this Bankrate story as well as gold-linked CDs.

As with the indexed CDs I covered in a previous post, investment advisers aren't that keen on currency CDs as they have hidden commissions and are expensive to trade.

According to a story written by Margaret Collins for Bloomberg News, "Market-linked CDs alluring," commissions on market-linked CDs can be between 1 percent and 3 percent.

A better way to invest in currency might be through mutual funds or ETFs, says Bill Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Mass.

Currency can be a good way to diversify your portfolio if you're casting about for alternative investments classes.

"It falls under alternatives because it's not correlated to stocks and bonds, it does have a lot less volatility than an emerging markets fund, both debt and equity," Larkin says.

"The big trend right now is emerging markets local currency funds," he says.

For the more intrepid investors, do hybrid CDs make sense to you? Anything that guarantees to at least return your principal and gives you a shot at an above-average-return, equal to 100 percent of the return of the index, seems too good to be true.  I feel like there's something I'm missing. What do you think?

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