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Do indexed CDs boost lagging CD rates?

By Sheyna Steiner ·
Thursday, May 27, 2010
Posted: 2 pm ET

What if you could buy a product that offered you the upside of the stock market with no risk to your principal? Sounds great, who wouldn't buy that investment?

Possibly someone who reads the fine print.

Indexed CDs start with the structure of a CD but the return is tied to an index such as the S&P 500 or NASDAQ or any number of other things including currency and individual stocks.

But do they beat vanilla CD rates? It depends on the individual indexed CD as they're all different and therefore very hard to compare.

"A lot of people don't understand them as well as they perhaps should. I would say be careful when you're buying these thing, they are more often used by retail investors than institutional," says Herbert Hopwood, CFP, president of Hopwood Financial Services.

"Not that institutions would not ever buy them, but they will read the full prospectus and realize that there are a lot of fees built into these things," he says.

Beyond the fees, investors are not guaranteed to get any return at all on some of these products. The return can be 100 percent of the index its tied to or it can be capped at a certain percent or there can be a guaranteed interest rate plus whatever upside the index offers.

Even if investors are dissatisfied with CD rates, they're not a product endorsed by many experts.

"A bond is a bond and a stock is a stock and the less things you throw into the mix the better off you are," says Bill Larkin. "I look at CDs as a savings rate investment tool and I would stick to just that. On the other side they are just trying to create higher fees, there is a bid-ask spread embedded and kind of a hidden commission in every bond, the index CDs are very expensive," he says.

Have you bought indexed CDs in the hunt for better CD rates? What do you think?

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