Market-linked certificates of deposit are a hybrid investment that combines the principal protection of traditional CDs with returns tied to an indexes performance. Since they are less common than stocks or bonds, it's important to understand how they work.
Like traditional CDs, market-linked CDs require investors to lock up their funds for a set period, generally two to ten years. To exit a market-linked CD, an investor needs to sell it on the open market. Principal deposits are also FDIC insured up to $250,000, providing the same protection as traditional CDs.
Where market-linked CDs and traditional CDs differ is in how returns are calculated. Instead of earning a fixed interest rate, the return for a market-linked CD is tied to the return of a benchmark, like the S&P 500. The CDs participation rate determines what percentage of the index's gain you receive. For example, a 130% participation rate means you capture 130% of the index's performance. Some issuers may guarantee the return of your original principal, even if the market declines.
Market-linked CDs may be suited for investors who want equity exposure and can commit funds for the full term. They may not be appropriate for those seeking liquidity, growth potential, or regular income. Before purchasing market-linked CDs, it is important to review the participation rate, term length, and underlying index to ensure alignment with investment objectives.
Sources: Yahoo Finance, Sofi, SmartAsset
This material is for informational purposes only and not intended as investment, tax, or legal advice. Market-linked certificates of deposit must typically be held to maturity to receive full principal protection. FDIC insurance applies only to the principal (and any accrued interest, if applicable) up to the applicable limits per depositor, per insured bank, and per ownership category, and does not protect against losses resulting from secondary market sales. Market-linked CDs may involve risks not associated with traditional CDs, including the potential for no return at maturity. All investments carry risk, including loss of principal. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Past performance is not indicative of future results. Projections or trends discussed are not guarantees. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.