I guess we shouldn’t be surprised… but it looks like we now we have financial engineering making its way into the commodities space. We came across EverBank’s MarketSafe Diversified Commodities CD today, which combines the promise of upside for commodities with the principal protection common with a bank CD (Certificate of Deposit).
A CD which can’t lose money, and which earns the cumulative return of the commodities tracked over 5 years (capped at 10% per year)…What could possibly go wrong? [heavy sarcasm]. I’m sure there were some nice mortgage backed security CDs like this back in 2007.
It’s brilliant on their end – as they can hedge the commodity exposure to get their cost of the money down close to zero (there is no annual interest on the CD), then turn around and loan that money through the bank at 5% or higher a year (locking in the difference). Although isn’t the Fed already providing banks capital at rates essentially zero? And it doesn’t look terrible for the investor, whom risks zero (assuming Everbank doesn’t go bankrupt and the FDIC is solvent) with a maximum payout of 50% after five years if each commodity they track earns 10% or more every year for the next five years.
But before dumping your entire retirement account into this nicely packaged bit of financial engineering, consider the chart below which shows longer term cycles in commodities. Seems we’re currently sitting at the top of the quickest and highest rise in commodity prices in the past 200 years (bubble?). While the downside may seem like zero, there are still risks if commodity prices fall (insolvency). And even a return of 0% over 5 years is not without problems in terms of real rates of returns and opportunity cost. If things do sell off, do you want your money locked up for five years, or liquid and ready for an opportunity.
Source: Hackett Financial Advisors
PS (for those in the industry) – how is it banks are allowed to show hypothetical performance without a hypo disclaimer??
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.