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If the equities markets show a negative return over the term of the "CD", you only receive back your original principal.
At Fido, Barclays offers a cap of 40% over the 5 years, whereas JPM offers only a cap of 25% over 4 years (non-callable). But Barclay's offering is NOT FDIC insured.
Fidelity has offered "principal protected notes", aka equity-linked notes (or CDs), aka market linked notes (or CDs) for a long time. IIRC there used to be a tab on their fixed income page for structured products. Now you can find the offerings (login required) at: https://fixedincome.fidelity.com/ftgw/fi/FICorpNotesDisplay?name=PPN
It is also common to find equity-linked notes in annuities.
You are effectively locked into the CD for the 3-4 years; there's little to no secondary market. Except that the two HSBC CDs shown are callable - another risk.
The participation is typically linked to price return not total return. So you're not getting the benefit of the S&P 500 divs. The HSBC prospectus says that the return is linked to SPX. That's a price index not a total return index.
Best case, you're getting about 5.3% annualized (17% cap) if the market goes up at least ~6.6%/year (including divs). Worst case, 0%. There are still fixed rate 3 year CDs paying over 4%.
So you'd be betting that the market return (including divs) will be greater than about 5.3% annualized over the next three years to beat a 4% CD. If you're comfortable with that bet, go for it. If a bird in the hand sounds better, stick with a fixed rate CD.
You can disregard the 0.75% placement fee. That's just what HSBC or whatever bank pays to Fidelity for selling you the CD. The return you're seeing quoted is the net return to you. It's what the bank is willing to pay you after paying Fidelity a fee.
Comments
At Fido, Barclays offers a cap of 40% over the 5 years, whereas JPM offers only a cap of 25% over 4 years (non-callable). But Barclay's offering is NOT FDIC insured.
Would be curious what others think.
https://fixedincome.fidelity.com/ftgw/fi/FICorpNotesDisplay?name=PPN
It is also common to find equity-linked notes in annuities.
The guarantee by the FDIC is limited to the principal invested and any guaranteed interest rate, but does not extend to the amount of any "contingent” interest.
https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/05/whats-the-deal--structured-cds.pdf
You are effectively locked into the CD for the 3-4 years; there's little to no secondary market. Except that the two HSBC CDs shown are callable - another risk.
The participation is typically linked to price return not total return. So you're not getting the benefit of the S&P 500 divs. The HSBC prospectus says that the return is linked to SPX. That's a price index not a total return index.
The S&P 500 Total Return Index (SPTR) includes dividends, unlike the standard S&P Index (SPX).
https://www.investopedia.com/terms/t/total_return_index.asp
Best case, you're getting about 5.3% annualized (17% cap) if the market goes up at least ~6.6%/year (including divs). Worst case, 0%. There are still fixed rate 3 year CDs paying over 4%.
So you'd be betting that the market return (including divs) will be greater than about 5.3% annualized over the next three years to beat a 4% CD. If you're comfortable with that bet, go for it. If a bird in the hand sounds better, stick with a fixed rate CD.
You can disregard the 0.75% placement fee. That's just what HSBC or whatever bank pays to Fidelity for selling you the CD. The return you're seeing quoted is the net return to you. It's what the bank is willing to pay you after paying Fidelity a fee.
Finally, here's a long piece by Kitces on how these sorts of structured investments work. Too late tonight for me to see that it covers what I expect. But I trust Kitces for completeness and clarity.
https://www.kitces.com/blog/building-your-own-equity-indexed-annuity-or-structured-note-by-pairing-bonds-with-equity-index-options/