EverBank's 3 Year Marketsafe BRICS CD Is Not A Certificate of Deposit At All

I have written in the past about EverBank’s practice of offering so-called “Marketsafe CDs” which are designed to give depositors the opportunity to earn above-CD rate returns tied to certain currencies or interest rate fluctuations. EverBank claims that the Marketsafe products, unlike those that it marketed a decade ago, do not involve a risk to principal if held to maturity and therefore these products can be marketed as CDs. The CD designation, however, remains dubious as EverBank reserves the right to return less (presumably much less) than the principal amount not only should you need the cash back earlier, but also upon death or adjudicated incompetence. Also dubious is EverBank’s right to offer these “Marketsafe CDs” with just an unclear termsheet instead of an offering memorandum filed with the SEC as is required by the Securities Act of 1933.

The description of the currently offered 3 Year Marketsafe BRICS CD reads a lot like a classified for a used car:

If you believe that good things are on the horizon for the major emerging market economies of Brazil, Russia, India, China and South Africa (aka the BRICS nations), this could be the opportunity you’ve been waiting for. With our all new MarketSafe BRICS CD, we’ve united the currency indices of all five nations into one bold financial opportunity. Available now through October 15, 2014, it’s your chance to seek the upside of the indices without any risk to your deposited principal. And with no cap on their upside potential, the results could be strong. Remember, as economies emerge, so too does opportunity. (https://www.everbank.com/investing/marketsafe/brics?cm_sp=marquee-_-1-_-marketsafeBrics)

The termsheet provides a little more color. It states that the product pays no regular interest for the three year period, but upon maturity delivers a single payment of your principal plus any appreciation of the basket of Russian, Indian, Chinese, Brazilian and South African currencies. While neither EverBank nor the depositor hold the basket, the exchange rates are observed bi-annually and the level of appreciation is calculated based on those measurements and a 20% allocation to each.

There are underlying realities that anyone investing in this product would need to be keen to ignore. First, in spite of what EverBank says on its website, the so-called emergence of these economies does not necessarily translate to currency appreciation versus the US dollar. The Russian ruble, the Indian rupee, the South African rand and the Brazilian real have all depreciated against the US dollar over the last 3 years (only the Chinese renmenbi has appreciated). As someone who has done business in all five of these countries and observed the outflow of money gained from commodities there into real estate in North America and Europe, I can assure you that even if one or two of these currencies appreciates against the US dollar over the next three year, the entire basket will not. This is especially true given that the prospects for the US dollar to appreciate globally are so strong as US interest rates begin to increase over the next three years.

Second, due to the measurement dates in EverBank’s instrument, the basket relies on steady and balanced appreciation versus the US dollar (decline in the US dollar) for the depositor to wind up with any appreciation in their so-called CD after three years. Each of these currencies is so inherently volatile that steady appreciation just is not going to happen in any one of the currencies, much less the basket.

Third, your money is not worth nothing over three years. The best three year online CD rate is currently 1.50%. $200,000 invested in a CD at that rate over will produce $9,136 in interest (exclusive of tax consequences) over that time. Since EverBank’s Marketsafe BRICS CD relies on a steady appreciation of the five BRICS currencies versus the US dollar and does not benefit from compounding of interest, you will need to see not just a steady increase in the basket (decline in the US dollar) versus the basket, but a steady decline that amounts to close to 2% a year just to match the return on a CD.

See the best 3 year CDs here.

A product that has none of the features or appreciation of a CD, but instead has a very high likelihood of returning only your principal is not a CD, but an interest-free loan to bank, and a bad investment. Those seeking straight exposure to emerging markets can invest in a US dollar denominated emerging market bond fund (either sovereign or corporate), and those believing that a fall in the dollar versus emerging market currencies is imminent can invest one that is not US dollar denominated. Investors can also look at registered offerings issued from time to time by Morgan Stanley and other investment banks that are designed to return up to 11% annually if a single currency, such as the Brazilian real, appreciates against the US dollar, and still returns 1% annually if they depreciate.