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The ABC’s of Market-Linked CDs

22 July 2019 in Investing Insights

This is our definitive field guide for navigating market-linked certificates of deposit (Market-Linked CDs). Investors are best served when they’re knowledgeable about the wide range of investment products that can advance their investment goals, here we present you chapter one of our three-part MLCD field guide

Let’s face it. As consumers, we’re drowning in a sea of choices in just about every category. From detergents to smartphones, the sheer variety of choices available to us are dizzying and overwhelming. When it comes to choosing certificates of deposit (CDs), we’re going to help you break it down so you can make your decision with greater confidence.

Unscrambling the alphabet soup of CDs and MLCDs

If you want to invest your cash in a safe haven or kick-start a savings plan, you may have considered certificate of deposits (CDs). These vehicles are generally lower-risk investments, if you have cash to put away and don’t need to draw on it for months or years. This is because when the CD reaches its maturity date, your initial principal will be returned to you while any additional payout you receive will depend on which kind of CD you invest in.

 

Traditional CDs, which pay interest on your cash deposit, have many flavors — you may have heard of a traditional CD, jumbo CD, step-up CD and the like. In this post, we’re not going to cover these variations because fundamentally, what you earn from traditional CDs is a fixed amount of interest. What’s more important to understand is there are two very different types of CDs on the market: traditional CDs, and Market-Linked CDs.

To explain MLCDs, let’s compare it to the more well-understood traditional CD:

Traditional CDs
  • A traditional certificate of deposit is typically issued by a bank that pays you interest on your deposited funds in exchange for leaving that money in the account for a fixed term.
  • By locking in an interest rate, however, you could miss out on an opportunity to earn higher interest if you’re in a rising rate environment. Conversely, locking in a rate in a declining rate environment could serve you well.
Market-Linked CDs
  • Market-Linked CDs do not pay you interest for leaving your funds in the account for a fixed term. Instead, the payout you get is linked to the performance of the stock market and is typically issued by banks.
  • The key difference between MLCDs and other stock market investment products is that you get your initial principal back at the end of the term.

What is the payout?

Traditional CD

Principal in the original amount of your deposited funds
+
Interest

Market-Linked CDs

Principal in the original amount of your deposited funds
+
Any potential return based on the performance of the underlying stocks*

 

CD Term

Both traditional CDs and MLCDs require you to leave your deposited funds in the account until the end of the term, at which time funds can be withdrawn. The term length can range from one month to an entire decade. If you cash out before your CD’s maturity date, you will most likely incur a penalty.

FDIC-insured

Both traditional CDs and MLCDs carry insurance protection, subject to limitations, including FDIC coverage up to $250,000 per account title. Please refer here for more information regarding FDIC insurance and limits.

MLCD Benefits
  • Preserve your principal while getting a chance to participate in the stock market upside
  • When you invest in stocks, you can gain or lose large sums in a short time period. With market-linked CDs, you get some exposure to the stock market without the risk of losing your initial principal. This means even though the MLCD’s underlying stocks decline, your principal is protected
  • You get the opportunity to diversify your portfolio by choosing an MLCD that is correlated to a variety of market indexes. Or you can gain exposure to a theme you believe in by choosing a MLCD linked to a thematic basket of stocks
MLCD Risks
  • When you put your money into a savings account or invest in a stock traded on a major exchange, you can withdraw funds or sell your holdings whenever you want
  • Since you won’t be able to sell MLCDs prior to maturity without penalty, you’ll want to consider the liquidity risk in the event you need to draw on your deposit before the CD’s maturity date. If you must redeem your MLCD before maturity, its value will be less than the amount you paid for

Learn more about Market-Linked CDs at Motif here


*Note that if the return of the underlying stocks is zero, or less, the MLCD will not pay any return above your principal investment. In this case, you’ll only get back your initial principal.

Investing involves risks, you should be aware of prior to making an investment decision. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector.

Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy. Past performance is no guarantee of future results.

Comparisons and descriptions of products described above are for provided informational purposes and are not intended to be comprehensive and actionable information which an investor should solely rely on to determine if an investment is right for them. Investors should carefully review the offering documentation for each product in order to understand the possible risks, restrictions, and possible fees, prior to making an investment decision.

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