There's an article (subscription req'd) on these index CDs in October's Money Magazine. The writer's opinion is that you would be better off with putting your money into a 50%-50% mix of stock and bond funds. The downsides that he mentioned included:
- limits your upside compared to the market
- early withdrawal penalties
- taxed as income not as capital gains
- stock dividends not usually included in returns
- tend to be very complex
It seems like Everbank has been simplifying their index CD products. The article mentioned that EverBank's MarketSafe CD uses an average of the closing price of the SP index every six months over the CD's 5-year term to compute the gain. However, EverBank's latest 5 year MarketSafe CD seems to be much simpler. The 5-year return is described as follows:
Earn the greater of:
a) 75% of the S&P 500 upside from Initial to Final Value Date plus your Principal Investment
b) 100% of Principal (FDIC insured)
That Money article compares these index CDs with stocks and bonds. For longterm investing, like for retirement, this may be a fair comparison. However, if you intend to use the money in around 5 years from now, stocks and bonds may be too risky.
This index CD could be a better choice than a standard 5-year CD. EverBank provides a history of hypothetical returns from this CD. Unlike the SP index, it never has negative returns. In bull markets, the returns are only 75% of the SP index. But this often far exceeded the returns of standard CDs (the highest was 165% over 5 years or about 21% annually.) So if you want something more exciting than a standard CD but don't want to risk your principal, these CDs may not be too bad.
For more information on these index CDs, refer to this EverBank MarketSafe CD Fatwallet thread and this State Farm MarketRate CD thread.