Index-linked CDs: Still low risk, they climb with stocks

Bruce Sickel has never thought of himself as a Wall Street guru, selling the intricacies of the US securities market to small savers. But Mr. Sickel, chief financial officer of Premier Bank in Doylestown, Pa., is helping bring the stock market to small savers who typically buy stodgy certificates of deposit.

And here's the kicker: Sickel's bank is offering them not only the prospect of high interest rates, but federal-deposit insurance on their principal.

In other words, Mr. Sickel's bank is combining the stock market and certificates of deposit to provide higher returns than those found on conventional bank CD products.

Premier Bank, which has seven offices in Bucks County and southeastern Pennsylvania, is one of some 75 banks around the US now offering "Index Powered CDs" (IPCDs) to customers. The interest rate on the product is tied to the performance of the Standard & Poor's 500 stock index. Buy an index-powered CD, and you receive an interest rate equal to 90 percent of the growth in the S&P index, averaged over the trailing 12 quarters.

Worried about a market correction wiping out your savings? Forget it. The CD is federally insured up to $100,000, and your principal is guaranteed.

"The indexed CD is a way of investing in the stock market without taking a direct loss in the stock market," says Ray Jones, director of marketing for Index Powered Financial Services.

The product is being offered to banks nationally by Index Powered Financial Services, in Denver. So far, S&P-linked CDs are available through banks in Pennsylvania, West Virginia, Delaware, Wisconsin, Illinois, Nebraska, Kansas, Oklahoma, and Colorado. Within the next two months, local banks are expected to join the program in the Southeast, and, by June, in the New York region, Jones says.

Prefer the Dow Jones Industrial Average, which tracks 30 large firms? Scores of community banks around the US are now being invited to offer CDs linked to the Dow.

The concept of offering index-linked CDs is hardly new. Large money-center banks in cities such as New York and Chicago, as well as brokerage houses, have offered somewhat similar products to their customers, often high-net-worth individuals.

"What we're doing is bringing these same types of products to Main Street, USA," says Mike Sherzan, president of Bankers Financial Services Corp. in Johnston, Iowa., which is marketing the Dow-linked CDs.

Currently, four banks in Iowa offer the Dow-indexed CDs: Leighton State Bank, Pella; Community State Bank of Spencer; Iowa State Bank, Knoxville; and Exchange State Bank, Adair. Some 12 other banks are in various stages of approval toward marketing the product.

Nationally, according to Mr. Sherzan, up to 9,000 community banks around the US will eventually be contacted about offering CDs linked to the Dow.

Index-linked CDs can benefit both local banks and individual savers. The CDs help redirect savings and investment dollars from brokerage houses, large money-center banks, and mutual-fund companies back to smaller neighborhood financial institutions.

And savers may scoop up higher yields on their CD products than with conventional CD products. For example, had a saver invested in the Dow-linked, five-year CD back in late 1996, he or she would have gotten a return of better than 9 percent, compared with current conventional CD rates of 5 percent or less.

"For a long-term saver, index linked CDs could be very good savings vehicles," says Laura Bruce, who tracks CD plans for Bankrate.com, a website and provider of financial information.

The CDs would be especially useful for anyone with a long investment time frame, say 15 to 20 years, Ms. Bruce says. A saver could use an indexed CD as the first rung for a larger ladder of CDs - staggering shorter term CDs around it.

Both the S&P 500 and Dow Jones products, as noted, are five-year instruments. Minimum deposits are typically $1,000. The products can be tucked into a retirement account such as a 401(k).

To learn more about the S&P-indexed CDs, go to www.indexpoweredcd.com. For the Dow product, go to www.bankersindexcd.com.