Structured certificates of deposit: the next big thingBlog added by Stephanie Marchant on April 2, 2012
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Stephanie Marchant

Kennesaw, GA

Joined: December 22, 2010

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The next best safe money strategy has arrived and it is called a structured certificate of deposit. Often referred to as market linked CDs or equity linked CDs, these bank deposits officially belong to a family of investments known as structured investments.

The New York-based Structured Products Association estimates that $50 billion of structured products were sold in 2010, up 62 percent from 2009. Over $60 billion in market-linked CDs were sold in 2011.

Why market-linked CDs are suddenly so popular is not difficult to understand. Traditional savers have long been attracted to the safety of principal protected traditional certificates of deposit because of the added security of FDIC insurance. However, today they are faced with historically low yields on those deposits.

With five-year yields below 1.5 percent and 1 year yields below .5 percent traditional CD savers run a significant risk of losing purchasing power. Enter market-linked CDs.

First offered in the United States in 1987 by Chase Bank, MLCDs were designed for the bank’s wealthiest customers. They offered the same principal protection as traditional CDs along with FDIC insurance, but with the potential for a much more reasonable rate of return. The return is earned much like a fixed indexed annuity in that it is linked to stocks, bonds, commodities, financials or indices.

While there are other safe money alternatives such as fixed annuities and U.S. government bonds, none of them enjoy the additional security of FDIC insurance. For many conservative investors this added layer of safety is essential for their peace of mind.

Those investors will always allocate some portion of their portfolio to bank deposits. Add to that the ability to gain exposure to different asset classes such as commodities and currencies without risk of principal loss if held to maturity and it is easy to see why market-linked certificates of deposit are being called the next big thing.
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