Q: Hello, I am a recent widow and I am for the first time handling my personal finances. I spoke with my bank's financial planner and he recommended the JP Morgan Efficiente 5-Year CD. It appears to have the benefits of a CD in safety, but has the ability to grow like an equity mutual fund. What are some of the pros and cons of this investment? Could you explain the associated costs?
A: The FDIC wrapped CD does not pay a coupon during its five-year life span and is not callable prior to its stated five-year final maturity. Principal is fully guaranteed, but the return is based on the performance of JP Morgan's Efficiente 5 Index. This is a proprietary algorithm created by JP Morgan that allocates assets across a basket of ETFs (exchange traded funds -- AKA mutual funds that are bundled and traded daily like a stock). As for costs, it acts much like a normal bond priced at $1,000, or generally priced at par value to the average investor.
The investor participation is 100 percent of the performance of the index from initial settlement to final maturity and is paid out (if total return is positive) only at the final maturity date. There is a floor set at zero so the investor is protected from taking any loss of principal.
This type of investment is best suited for investors looking for principal protection over a five-year period with a return more likely to exceed the rates of current traditional interest-bearing CDs with five-year duration.
Pros of this investment include principal protection through FDIC, downside protection of the market and upside potential of the market. On the other hand, cons include liquidity concerns of the secondary market, linked index limited history (established Oct. 29, 2010) and CD strategy is subject to currency exchange risk.