According to Bloomberg’s article “Wells Fargo Aims Market-Linked CDs at ‘Nervous Nellies’,” banks like Wells Fargo and Sovereign are trying to give investors the benefits of two worlds with equity linked CDs. Authors Margaret Collins and Zeke Faux say that the popularity of this investment is based on the fact that investors have the potential for higher returns with the safety of FDIC insurance. It is possible that an investor will not gain anything if the index doesn’t, but that is rare and they also will not lose any of their initial investment. During times of high volatility in the markets, equity linked CDs become increasingly popular. They occupy around 15 to 20% of structured settlements currently, which is three times the amount they did before 2008’s financial crisis.
Investors are seeking that FDIC insurance to lower their investment risk. It makes sense since so many people lost life savings in the stock market collapse. Wells Fargo’s wise indexed CD helped the company sell almost $5 billion worth of equity linked CDs last year. Traditional CDs have very low rates right now, so linking your investment to an index gives the potential for more returns along with the benefits of traditional CDs. Investors do have to pay yearly taxes on the estimated interest income, so make sure you look into all the fine details before purchasing. If you have the ability to let your money sit for five or so years, you have the potential for nice gains without the risk of losing your initial investment.
