Ask Matt: Are market-linked CDs a good idea?

Q: Are market-linked CDs a good idea?

A: Savers looking for decent interest rates on their money need to search far and wide. That search is unearthing somewhat unusual investments like the market-linked certificate of deposit (CD).

The market-linked CD blends the potential upside of stock market returns with the stability of a certificate of deposit. These are somewhat unusual savings vehicles created by banks, hamstrung with offering low savings rates, to lure savers looking for more upside. As with a standard CD, consumers deposit their money in a market-linked CD with the understanding the cash cannot be accessed for some time without paying an early withdrawal fee. Both market-linked CDs and traditional CDs promise the saver will at least get their original principal back. Both market-linked and traditional CDs are guaranteed by the FDIC.

But that's where the similarities end. Most market-linked CDs have much longer terms than some traditional CDs, usually spanning many years. Returns on market-linked CDs rise or fall based on the performance of a benchmark, such as a broad market index like the Standard & Poor's 500. Some market-linked CDs offer a minimum return, others don't. Traditional CDs, on the other hand, promise a set interest rate. Market-linked CDs can be an option for investors who are risk-adverse, don't need current liquidity and want higher returns offered by CDs.

Paste BN markets reporter Matt Krantz answers a different reader question twice a week. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.