EverBank is again offering a new MarketSafe CD. Its latest version is called the MarketSafe Diversified Commodities CD. It's not the typical CD in that there is no guaranteed rate of return. However, it does guarantee that you will not lose any principal over the 5 years if you avoid early withdrawals.
If you're comparing this CD to investing in commodity ETFs or mutual funds, the main advantage is the principal protection. However, you pay a price for that protection in the loss of much of the potential upside performance of the commodities.
EverBank's CD Terms Sheet has the details. Here's a summary:
- Minimum Deposit: $1,500
- Reference Index: Spot Price of 10 commodities
- CD Term: 5 years
- Fees: No account fees
- Minimum APY: 0%
- Initial Value Date: March 24, 2011
- Final Value Date: March 24, 2016
- Maturity Date: March 29, 2016
- Pricing Dates: Five Annual Pricing Dates
- Participation Factor: 100%
- Maximum Market Upside Payment: The sum of the average returns for years 1-5, based on the Spot Price as of each Pricing Date relative to the Spot Price on the Initial Value Date, subject to a 10% cap and -20% floor for each commodity.
Big Caps on Upsides
The main downside is how they cap the upside performance. There's a 10% cap on the upside performance of each commodity, but the floor is set at -20%. It doesn't take many under-performing commodities to make a substantial reduction in the average performance. This is shown in the hypothetical examples in the terms sheet which show how the performance calculations will be done. In the Year-2 example, 9 commodities had large returns and only one had a bad year. The result is an average return of only 7.1%.
Other Important Downsides:
In addition to the loss of much of the upside returns, no early withdrawal is allowed. If you die, your heirs can take an early withdrawal but there is no principal protection. Here's how EverBank describes this:
Except in the event of death or adjudication of incompetence of the holder of the MarketSafe CD, you may not withdraw any part of the CD prior to maturity. If you do withdraw early, even if that is due to the death or adjudicated incompetency of the holder of the CD, you will NOT receive Principal Protection and will NOT benefit from any upside potential of the Reference Index, experiencing a loss of principal as an early withdrawal charge.
If held outside of an IRA, the tax consequences of this CD seem complicated. It appears you are taxed yearly even though the rate of return is unknown until maturity. Here are the details as described in section 4.3.11 of the EverBank's Terms & Conditions page:
Tax Considerations. For United States Federal income tax purposes, EverBank intends to treat a MarketSafe CD as a "contingent payment debt instrument" subject to taxation under the "noncontingent bond method." Accordingly, a U.S. holder of a MarketSafe CD will be required to accrue interest income on a MarketSafe CD in its gross income each year on a constant yield to maturity based on a comparable yield in accordance with the original issue discount rules (subject to adjustment to reflect differences between actual and projected payments). The depositor should also be aware that, for purposes of calculating the interest, if any, payable on the MarketSafe CD(s) at maturity, the appreciation in the investment will be determined based upon the Product Calculation Rules noted in the Term Sheet, and treated for U.S. federal income tax purposes as ordinary income, not capital gains.
Is It a Good Deal?
As I mentioned, the main advantage of this CD over other commodity investments is its principal protection. An important question is whether this is worth the big caps on the upside return. It seems like one could do better with commodity ETFs along with portfolio diversification.
One could also compare this MarketSafe CD with a regular CD. If you're lucky, your returns could be a lot more than a regular CD. If you're not lucky, your return could be zero. Perhaps if the CD had a minimum return guarantee higher than zero percent, it might be worth it.
In a previous post on Equity-Index CDs (or equity linked CD), I described how you can build your own equity-index CD with a combination of a stock mutual fund and a 5-year regular CD. The same could be done with currencies or gold through ETFs. The TheFinanceBuff blog has an informative case study on index linked CDs which shows that index-linked CDs can have advantages. However, each index linked CD has to be evaluated to understand its pros and cons.
Other EverBank Accounts
EverBank also offers World Currency CDs which unlike the MarketSafe CDs don't offer any principal protection. Please refer to my EverBank World Currency CD review for more details about these CDs. The financial crisis that hit Iceland in 2008 showed the risks of investing in these CDs. I have more details about these risks in this Foreign CD review.
If you prefer to stay with conventional money market and checking accounts, EverBank is still offering 2.01% for the first 3 months on its Yield Pledge Checking and Money Market Account (up to $100K on the checking and $50K on the MMA). The ongoing rates are not the best, but they have remained fairly competitive. EverBank does have some nice account features such as its online check deposit.
EverBank is one of the larger internet banks with $11.55 billion in assets. The bank has an overall health score at DepositAccounts.com of 3 out of 5 with a Texas Ratio of 44.17% (average). Please refer to our financial overview of Everbank for more details. EverBank has been a FDIC member since 1998 (FDIC Certificate # 34775).