This blog post is the last in a three-part educational series that puts Market-Linked Certificates of Deposit under the microscope.
In our previous posts, we outlined principles you’ll want to consider as you sift through the various features an MLCD can provide. Here, we’ll give you some considerations to help decide if a Market-Linked CD is a good fit with your risk appetite and liquidity needs.
MLCDs may fit in with your current strategy if…
…You want to take advantage of the rate environment:
With the Fed’s decision to cut interest rates another quarter-point, the rates on traditional Bank CDs may likely follow suit. If you are seeking FDIC insurance and want exposure to the potential of higher rates, an MLCD might be right for you. As a reminder, the payout of an MLCD is tied to the performance of the underlying index, which are often based on equity markets. It’s important to make sure the underlying index meets your risk tolerance.
Bottom line: With MLCDs, your returns are tied to the performance of an underlying index, which means in a low-rate environment MLCDs can be an alternative investment vehicle for investable funds that you are trying to put to work.
…You’re looking to add growth potential to your portfolio
If your low-risk appetite has you investing in mostly bond funds and traditional certificates of deposit (CDs), keep in mind that inflation could easily take a bite out of any returns you get from with these vehicles. Since MLCDs give you exposure to the stock market, they could deliver growth and diversification to your portfolio.
Bottom line: By participating in the stock market’s upside, MLCDs could potentially give your conservative portfolio a lift and diversification. If the stock market does not outperform, your return is your principal invested.
You might want to consider MLCD alternatives if…
…You can’t keep your hands off your initial deposit
Since all CDs require that you leave your funds in deposit until the end of term, be sure you’re comfortable with the term limits. If you need to withdraw early, you may take a hit as described in the offering circular
Bottom line: It’s important to review the term limits before investing in Bank CDs or MLCDs.
…You’re seeking guaranteed returns
At maturity, MLCDs pay investors a participation rate above the principal and only when their underlying index generates a positive return. This is an investor’s market opportunity risk with an MLCD. If the index underperforms, there may be no payout at maturity, above the principal amount invested.
Bottom line: If you insist on guaranteed returns, an MLCD may not be the right investment choice. You may prefer another investment vehicle such as a traditional CD, a money market savings account or U.S. Treasury securities.
…You’re expecting dividends
If you’re looking for stocks that generate dividend income, you won’t find that in MLCDs. Remember, dividends don’t pass through to MLCDs.
Bottom line: If getting dividend checks is important to you, consider investing in stocks that have a proven record of distributing dividends.
*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.