Gimmicky CDs for 'Nervous Nellies'

With interest rates near historic lows, Wells Fargo (WFC), Sovereign (STD), and other banks are offering certificates of deposit tied to equity indexes, commodities, or currencies. The pitch: They're safe—backed by the Federal Deposit Insurance Corp.—and could pay out more than conventional CDs. But they're complicated, and buyers could end up earning little or no interest.

"Market-linked CDs are a great selling tool [to appeal to] nervous Nellies," says Thomas Balcom, founder of Ibis Wealth Management in Boca Raton, Fla. Wells Fargo sold about $5 billion of its market-tied CDs last year. Sovereign's, which bet on the performance of the Standard & Poor's 500-stock index, have attracted $1 billion since October. Yet "there are other ways to get similar returns without all the complications," says Thomas Orecchio, principal at Modera Wealth Management in Westwood, N.J.

Sovereign's market-linked CD comes as a package consisting of a conventional six-month CD paying 2 percent interest and a three-year CD that pays 2.9 percent each year that the S&P 500 is higher than on the purchase date. If the index hasn't gained ground, the owner gets no interest for that year. The minimum investment is $5,000, split evenly between the two CDs.

Safety-minded investors can create something similar to a market-linked CD using a Treasury security known as a zero-coupon bond, which is sold at a discount to the maturity value. For instance, earlier this month a saver with $1,000 could have laid out $910 to buy a $1,000 zero-coupon bond maturing in 2015, and invested the remaining $90 in a stock index fund.

The bottom line: Investors who put money into market-linked certificates of deposit may end up earning little or no interest.

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