Post by jeffolie on Apr 15, 2011 10:11:43 GMT -6
EverBank Diversified Commodities CD, Stupid Invest. of week
Casey's letters and emails advertised EverBank Diversified Commodities CD as a 'good' approach.
BS
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BOSTON (MarketWatch) — For most investors, “certificates of deposit” conjure images of ultra-safe, boring, staid bank notes. “Commodities,” meanwhile, create a picture of go-go, rapid-trading, high-risk/high-reward investing.
Combined into one product, and you have the new EverBank Diversified Commodities CD, an investment that combines commodities and deposit insurance to create the Stupid Investment of the Week.
more...
But the EverBank product is not a suitable alternative to commodities, at least for anyone looking for the kind of gains commodities traditionally deliver. Neither is it a great alternative to fixed-income investments where a saver is trying to squeeze extra yield.
Limited appeal
In you like EverBank’s concept, you’d be better off buying a zero-coupon bond to guarantee you have a set amount five years from now, and then investing the remainder into commodity-based exchange-traded funds.
That’s because the EverBank product takes the average return from each of those commodity groups, and caps the upside potential for each at 10%, while the downside damage maxes out at 20%. That structure guarantees that bad performance in any of those commodities will have more impact than big gains for several categories. In short, one bad apple spoils the whole bunch.
If you like all 10 commodity groups, the CD’s formula still produces an ugly result, in the same way that all colors in a rainbow are beautiful until mixed together to create a muddy brown puddle.
If every commodity is up more than 10% for the year, your maximum gain for the year would be 10%. If nine commodities are up at least 10%, but one is down 20%, the return drops to 7%. If seven commodities deliver the maximum gain and three are big losers, the CD would generate a 1% gain.
So let’s say you feel great about oil and metals — six of the CD’s commodity groups — and they all double in the first year. Meanwhile, the four food commodity groups all suffer a 15% loss. Your six “doubles” only put 60% onto the plus side, while your four losers take that much away, leaving you with nothing. In short, the structure “protected” your principal, but at the cost of your gains.
By comparison, an investor with $10,000 could get a five-year zero-coupon bond — paying 2.25% — for a present value of roughly $8,950. That would leave $1,050 to throw into a broad-based commodity fund. The bond delivers $10,000 after five years, and the investor keeps whatever growth they get from the commodities, without any cap on earnings.
Michael Kitces of Pinnacle Advisory Group in Columbia, Md., noted that investors have no clue from EverBank’s paperwork just how much of their deposit is needed to procure the principal guarantee, and how much goes to commodities. “This is why a lot of experts are critical of equity-indexed annuities and structured notes,” Kitces said, “because in reality, the company keeps a very big slice of this interest spread, which the consumer never sees directly.”
And while the EverBank product does have coverage from the Federal Deposit Insurance Corp., it lacks one essential piece of most banking products, compounding. Each year is a separate event; any growth is applied only to your initial principal, and not to gains made throughout the holding period.
What’s more, investors are locked in for the full five years. Leave early — and the fine print makes it clear that even death is not an acceptable excuse — and the principal protection and the upside from the index are gone, leaving you with “a loss of principal as an early withdrawal charge.”
Clearly, there are many conditions where the returns could be positive and the product could deliver a return that beats a traditional five-year CD. And for the $1,500 minimum, an average investor could get broad-based commodities exposure or principal protection, but probably not both.
“If you want to buy commodities, buy them. And if you want principal protection, get it,” said Michael Falk, a Chicago-based asset manager. “But why blend two things that don’t really go together into one product? This is a sexy, convenient product that pretty much anyone can feel good buying, but which isn’t likely to achieve its true mission.”
www.marketwatch.com/story/commodities-cd-wont-live-up-to-its-hype-2011-04-15?link=MW_home_latest_news
Casey's letters and emails advertised EverBank Diversified Commodities CD as a 'good' approach.
BS
======================================================================
BOSTON (MarketWatch) — For most investors, “certificates of deposit” conjure images of ultra-safe, boring, staid bank notes. “Commodities,” meanwhile, create a picture of go-go, rapid-trading, high-risk/high-reward investing.
Combined into one product, and you have the new EverBank Diversified Commodities CD, an investment that combines commodities and deposit insurance to create the Stupid Investment of the Week.
more...
But the EverBank product is not a suitable alternative to commodities, at least for anyone looking for the kind of gains commodities traditionally deliver. Neither is it a great alternative to fixed-income investments where a saver is trying to squeeze extra yield.
Limited appeal
In you like EverBank’s concept, you’d be better off buying a zero-coupon bond to guarantee you have a set amount five years from now, and then investing the remainder into commodity-based exchange-traded funds.
That’s because the EverBank product takes the average return from each of those commodity groups, and caps the upside potential for each at 10%, while the downside damage maxes out at 20%. That structure guarantees that bad performance in any of those commodities will have more impact than big gains for several categories. In short, one bad apple spoils the whole bunch.
If you like all 10 commodity groups, the CD’s formula still produces an ugly result, in the same way that all colors in a rainbow are beautiful until mixed together to create a muddy brown puddle.
If every commodity is up more than 10% for the year, your maximum gain for the year would be 10%. If nine commodities are up at least 10%, but one is down 20%, the return drops to 7%. If seven commodities deliver the maximum gain and three are big losers, the CD would generate a 1% gain.
So let’s say you feel great about oil and metals — six of the CD’s commodity groups — and they all double in the first year. Meanwhile, the four food commodity groups all suffer a 15% loss. Your six “doubles” only put 60% onto the plus side, while your four losers take that much away, leaving you with nothing. In short, the structure “protected” your principal, but at the cost of your gains.
By comparison, an investor with $10,000 could get a five-year zero-coupon bond — paying 2.25% — for a present value of roughly $8,950. That would leave $1,050 to throw into a broad-based commodity fund. The bond delivers $10,000 after five years, and the investor keeps whatever growth they get from the commodities, without any cap on earnings.
Michael Kitces of Pinnacle Advisory Group in Columbia, Md., noted that investors have no clue from EverBank’s paperwork just how much of their deposit is needed to procure the principal guarantee, and how much goes to commodities. “This is why a lot of experts are critical of equity-indexed annuities and structured notes,” Kitces said, “because in reality, the company keeps a very big slice of this interest spread, which the consumer never sees directly.”
And while the EverBank product does have coverage from the Federal Deposit Insurance Corp., it lacks one essential piece of most banking products, compounding. Each year is a separate event; any growth is applied only to your initial principal, and not to gains made throughout the holding period.
What’s more, investors are locked in for the full five years. Leave early — and the fine print makes it clear that even death is not an acceptable excuse — and the principal protection and the upside from the index are gone, leaving you with “a loss of principal as an early withdrawal charge.”
Clearly, there are many conditions where the returns could be positive and the product could deliver a return that beats a traditional five-year CD. And for the $1,500 minimum, an average investor could get broad-based commodities exposure or principal protection, but probably not both.
“If you want to buy commodities, buy them. And if you want principal protection, get it,” said Michael Falk, a Chicago-based asset manager. “But why blend two things that don’t really go together into one product? This is a sexy, convenient product that pretty much anyone can feel good buying, but which isn’t likely to achieve its true mission.”
www.marketwatch.com/story/commodities-cd-wont-live-up-to-its-hype-2011-04-15?link=MW_home_latest_news