Banking 101: What is an NSF Fee?
Banking 101: Understanding Your Bank Statement
Banking 101: What to Look for in Prepaid Debit Cards
Banking 101: Annuity vs CD - How Do They Compare?
The Search for Higher Rates - Foreign Currency CDs
In this discussion forum thread yesterday I posted a link to an article that gave an overview of 8 investments for those looking for an alternative to bank CDs. These will likely provide higher yields than what traditional bank CDs provide in today's awful interest rate environment. As I mentioned in the forum thread, all but one have risks.
There is one additional investment that wasn't mentioned. It's actually a bank CD, but it offers much higher yields. It's FDIC-insured, BUT there is a risk of loss. It's the WorldCurrency CDs offered by EverBank. These are foreign currency accounts that are denominated in a foreign currency. These can offer a high yield along with a chance of appreciation if the dollar falls. However, there is also the risk of a loss of principal due to changes in currency exchange rates. It can be confusing to think that an FDIC-insured account may have a loss of principal. Here's what EverBank states in its small print:
FDIC insurance covers against loss due to the failure of the institution, but not fluctuations in currency values. Due to the nature and volatility of the foreign exchange market, the values of currencies are subject to wide fluctuations against the U.S. dollar and investments in foreign currency denominated instruments will entail significant risk exposure to adverse movements of the foreign currency relative to the U.S. dollar.
I described many details of these Currency CDs in this 2007 EverBank post which included an interview with an EverBank VP.
These WorldCurrency CDs was very appealing until the 2008 global financial crisis. The CD rates varied by country, and one of the countries that had the highest rate was Iceland. The risk/reward principle hit home on this one. Iceland's financial crisis appears to have caused these CDs to experience a major loss. Hans at OpenMarket described the loss he experienced and how it seemed to be more than what should have been expected.
Not all countries have CDs with attractive yields. However, there are a few with yields higher than what you can get here in the U.S. Below is a list of the best 3-month WorldCurrency CD yields listed at EverBank as of 8/25/2011:
- 3.03% APY - Australian dollar
- 4.84% APY - Brazilian real
- 3.55% APY - Indian rupee
- 3.68% APY - South African rand
The above countries are much larger than Iceland so I would think there would be less chance of experiencing the loss that investors experienced with Iceland CDs. But there's no guarantee.
One note about these CDs is that there is a currency conversion fee when the funds are converted into U.S. dollars. However, if you let the CDs automatically renew, there is no conversion fee. So this fee shouldn't have a major impact if you use these CDs as more of a longer-term investment.
"FDIC insurance covers against loss due to the failure of the institution.........."
But, you did not explain that the only institution covered is EverBank and nothing else.
You did not explain that EverBank charges hidden fees to get in and to get out.
You did not explain that the lowest exchange rate for the past 10 days is the default exchange rate.
You did not explain that if you are getting monthly payments of those CDs that the exchange rates are variable and that a hidden commission is charged on the exchange float.
You did not explain that EverBank is run by crooks and that there is delay to get in and get out of these CDs for up to two weeks. They only buy and sell these CDs on Fridays and if you send then a check, they will hold it up to two weeks before a foreign CD is open.
I have tried those CDs and lost money on every single one of them. Not worth the risk and the outrages fees and low ball exchange rates and frustrations with EverBank.
Good luck to anyone jumping into this adventure.
The conversion fee applies anytime you change currency. When you buy the CD there is a currency conversion fee (it was stated at the time about .75%, but I could not verify) and when you redeem into dollars again. When re-newing a CD there is no fee.
I have several accounts with Everbank and several with Rydex. For the Chinese remnimbi, I use bank of China in NY. BOC is having a special for new accounts (which I had for my current accounts with them) of 1.25 on CD's. Their currency conversion seems to run about 1.25% or so.
Why bring FDIC into the picture on a foreign CDs is beyond believe.
None of your money is insured, period, FDIC can not protect your money in a foreign bank if that banks goes out of business.
What you implied was, that if EverBank fails or goes out of business, FDIC will return the money to you at then present value, (not the full value invested), FDIC will not pay for the loss of your principle.
I rarely use them now because there are better alternatives for foreign denominated funds (Rydex for one). A few years back they were the only game in town, unless you had major money and could invest overseas directly.
I too had Australian and Swiss denominated funds (from Rydex) and they have done very well. What will be going forward, who knows.
With FXCM or Ameritrade Foreign currency trading, you can do high leverage. And if you buy the AUD/USD currency pair, current interest is about 3%, and you won't get a 1099-INT !
Also, when you buy/sell the Foreign Currency, the Spread is MUCH cheaper than regular Bank.
So say you got $10,000. You put around $1500 to the foreign currrent trading account , leveraged to buy $10,000 AUD. Now mentally you should consider all your $10k is gone buying AUD (australian), and don't spend the $8500. You now put the $8500 into a rewards checking account to earn another 3%.
Total interest earned is around 5.X %, I have been doing this for almost a year now, works great !
Let's say in worst case AUD is dropping a lot, and your Foreign account balance is close to 0, you withdraw some money from Rewards checking into the Foreign current account to keep your AUD
says is that EverBank has been caught in illegal operations in foreclosure properties and has been used as holding company for illegal activities and has been given 60 days to cease and desist such activities, if not, EverBank may be fined, closed or put out of business for being involved in unregulated loans and foreclosure activities.