Watch CDs Tied to Index

BY RACHEL LOUISE ENSIGN

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Investors hungry for income are increasingly being pitched so- called marketlinked certificates of deposit.

But buyer beware.

With a market-linked CD, returns are generally pegged to a market index's future performance, though the principal is typically safe from market swings.

Such CDs may promise higher returns, but can be riskier than typical CDs, the Federal Deposit Insurance Corp. warned in a recent newsletter. With major indexes sinking last week, the returns of these CDs could've taken a hit.

The Securities and Exchange Commission on its website also says investors should do due diligence on these products. Make sure a marketbased CD is FDIC-insured, as some aren't, says Lori Schock, director of the office of investor education and advocacy at the SEC. If a CD isn't insured, your principal isn't guaranteed by the government if the financial institution that sold you the CD goes under.

Market-linked CDs typically have longer terms than other CDs. And you'll usually face penalties for cashing in early.

You should know what investments any returns are tied to-stocks, bonds, foreign currency or other assets.

If the CD is tied to an index, ask how closely your return is actually based on that index.

Some of these CDs may be structured so your actual return can deviate significantly from that of the index, says John Hauserman, certified financial planner and president of Retirement Quest, an investment advisory firm in Marriottsville, Md. "The devil's in the details," he says.

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