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I had never heard of these before. CDs with returns tied to an index (like S&P 500) but still FDIC insured and principle guaranteed. Sounds like it would a good idea for fixed income portion of portfolio, maybe.

Anyone with experience in them? Thoughts?

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The one I saw claimed that you could never lose money. If the market went up, you made money. If it went down, your balance stayed the same.

Then in the fine print, it said that your gains were limited to 3% per month. Now looking at the returns for the full months over the last 5 years, we have, in % including reinvestment of distributions form SPY:


So in the most of the months when the market went up, it did much better than 3%, and in fact about half or more is taken out during those good months. Taking that off the top, and using puts to make money during the bad months should yield a pretty good profit for the fund manager.

I did a similar analysis about 4 years ago when the salesman presented me with the deal, and of course I did not buy.

That was at one of those "free lunch" seminars at an excellent and very expensive restaurant, and I went for the meal and out of curiosity. However, even though it was an excellent restaurant, the guys giving the seminar must have gotten a special deal on the rubber chicken lunch.

I really thought that the restaurant had some minimum standards, but I guess I was wrong.
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Justin Capetola, a managing partner at Blue Bell Private Wealth Management in Blue Bell, Pa., says consumers should be able to find a matching return on an index up to 45 percent or so. He recently offered his clients five-year indexed CDs that pay no interest and match the Dow's return up to 47.8 percent.

"These clients want to be safe, but they still want to have some chance for market participation over the next five years," he says.

Other risks remain. Some indexed CDs have a "knockout" rate, which sends the return back to zero if the index soars too high. In such cases, "you're really making a bet about market volatility -- that the market will stay in a range," Geczy says.

Two other areas to watch out for: taxes and fees.

Typically, a bank issuing the CD will hedge against the potential cost of making a payout to you. It will pass along the cost of that hedging contract to you. Similarly, a financial adviser may charge a fee of roughly 3 percent of your investment.


Sounds like the market would have to rise by at least 6% just to break even on this puppy.

I'd leave this dog at the shelter.

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If it sounds too good to be true....
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This product sounds remarkably like an index annuity. Here is a thread about them from the annuities board--

1. Read the contract carefully before you sign. Your funds may actually be with an annuity company. You can have high surrender fees.

2. Caps (or partial participation rates) often mean you get less than the full gain from the underlying index.

3. The guaranteed return can depend on annuitizing the contract, but many don't do that because they would rather assets went to their heirs.

4. Many are dissatisfied with the less-than-promised return actually received but surrender fees make it difficult to do anything else.

My aunt had her bank sell her an annuity with "guaranteed yield" when one of her CDs matured and she was unhappy with the lower CD interest rate offered. It turned out the guarantee was only for a few years, after which the yield fell by half. But she was stuck leaving her money there because of the surrender fees.

It was a bad investment, sold by a reputable bank.

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"It was a bad investment, sold by a reputable bank."

Really? There are such banks?
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I went into one of these in the mid90s -- Saw it first in a Republic National Bank (NYC) - Looked pretty good. $10,000. I was 20 years younger and welcomed a wee bit of risk. One of Rep. Nat'l's ads was fond to be misleading and so we would get an extra few percent.

The CD was tied to S&P and earnings on CD would mirror CD. In case of loss the minimum earning on CD was 1%.

Shortly after I put my 10K at Rep., Citi put out a similar ad. I wish I'd taken Citi up on another CD, perhaps 20K.

So in a little less than 5 years I had a check for almost 23K. It felt a little like Alice Down the Rabbit Hole but wonderful.

Those were the days my friend. We thought they'd never end.
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never heard of these -how do they work -are they available able now?
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Hi ltangel,

never heard of these -how do they work -are they available able now?

Bunches of them, and they're all over the map in term & tie-in;

Not necessarily good, not necessarily bad... if you don't mind being relatively illiquid, staying in the fully-taxed category, and taking upside-only volatility risk, they are an option to consider.

Dave Donhoff
Leverage Planner
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