Income-generating CDs a bright spot, distributor says; offers alternative to plain deposits

By Kenneth Lim

Boston, June 9 - Investors are flocking to income-generating structured certificates of deposit in search of better returns amid a low interest rate environment, a distributor said.

A number of income CDs are currently being marketed.

Harris NA is offering variable-rate CDs due June 30, 2015 linked to a basket of 10 stocks. The basket comprises equal weightings of the common stocks of Costco Wholesale Corp., CVS Caremark Corp., Exxon Mobil Corp., Home Depot, Inc., Honeywell International Inc., McDonald's Corp., Microsoft Corp., Monsanto Corp., Nokia Corp. and Wells Fargo & Co.

The interest rate will be the sum of the weighted returns of the basket stocks, subject to a floor of zero. Each stock's return will have a floor of negative 35% and a cap of 12% to 16%. The exact cap will be set at pricing.

HSBC Bank USA, NA is also offering annual income opportunity CDs due June 30, 2015 linked to a basket of 10 stocks.

The basket comprises equal weightings of the common stocks of Amazon.com Inc., ConocoPhillips, Google Inc., Hewlett-Packard Co., Home Depot, Inc., Intel Corp., JPMorgan Chase & Co., Merck & Co., Inc., UnitedHealth Group Inc. and Walt Disney Co.

The interest rate will be the average of the basket stock returns, subject to a floor of zero. Each stock's return will be capped at 11% to 15%. The exact cap will be set at pricing.

Insured protection

Structured CDs have been providing brisk business for the industry, the distributor said.

"That FDIC insurance is really something that's helping us to offer solutions at a time when investors' risk appetite is extremely low and markets are extremely volatile," the distributor said. "If not for CDs, things would have been a lot worse."

Unlike structured notes, which are often senior unsecured obligations of issuers, the CDs are insured by the Federal Deposit Insurance Corp up to $250,000 per depositor per bank. That federal guarantee is valuable to risk-averse investors as well as investors who are new to structured products, the distributor said.

"It's new and they feel like they just want to get their feet wet first, so it's useful to be able to offer a low-risk option like this," the distributor said.

Hunger for yield

Income-generating structured CDs are a popular alternative to straight CDs because they also offer a regular interest rate, the distributor said. By linking their interest to an asset, investors hope to receive a better yield than a straight product. Such a strategy is more popular now because of interest rates are currently languishing at lows.

"There's no way you can achieve your investment targets by sticking with cash or a straight CD with current interest rates," the distributor said. "Before structured products, you either left your money in a CD or you bought some funds or stocks, for example. But one is really safe but has really low returns, and the other is very risky, especially in a highly volatile market, even though the returns could be better. This gives you a bit of both worlds. You get the FDIC protection and you have a chance to take part in gains in a better performing market."

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