Goldman Sachs, the so-called “vampire squid” of the American economy, is reportedly unveiling a new retail banking product soon: an equities-backed CD. Specifically, the CD will track the Dow Jones Industrial Average, and it will have a 48-month term. Rumor has it that CD will guarantee an APY of 0.50% (so a 2.02% return overall) at a minimum, and at most it will return 24%.

On the face of things, knowing what we know about the current state of bank rates, this sounds like an interesting investment. Currently, savings interest rates are hitting miserable lows, even at online banks, which used to boast attractive rates. CD rates are also low: 0.61% average APY for a 12-month term and 1.22% APY for a 48-month term. Brick-and-mortar bank rates are even lower than that: BofA is offering 0.85% APY on 48-month CDs — a 3.44% return overall.Goldman’s product can’t guarantee returns that nice, but still it’s only 1.42% below BofA’s CD, and the prospect of a 24% return is undeniably enticing.

The Federal Reserve is keeping cash cheap, and the markets aren’t providing much incentive for small investors to risk their cash by investing in equities. But with Goldman’s CD, your principal is guaranteed, with an 0.5 % minimum APY on top. You can invest in the stock market without the potential of losing what you have contributed.

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But does that mean it will be worth it? No, not necessarily.

Dan Caplinger at The Motley Fool argues that while the Goldman CD does offer good downside protection from the market, it is designed to never deliver returns as good as the Dow Jones’ gains are. The CD has a “downward bias” in the way it is designed because it caps monthly gains at 1.5 or 2%, but “fully incorporate[s]” monthly losses into the CD’s value.

The odds that you’ll see the maximum 24% on this product are low, argues Caplinger. Unless, of course, the Dow enjoys 48 consecutive months of growth. Volatility, which defines the markets these days, kills the value of this investment.

Not only that, but you have to consider the question on everybody’s mind: What’s Goldman’s angle here?

Walter Kurtz at Seeking Alpha makes the case that this CD product is a way for for Goldman to get cash for cheap, thereby solving a liquidity problem they’ve had for some time. Unlike a retail bank, which has loads of almost-free cash in deposits, Goldman “[relies] on capital markets for funding, forcing it not only to pay higher financing rates, but making its funding costs extremely volatile, translating into unstable earnings and high stock volatility.”

Their solution, Kurtz argues, is to create a new product — this CD — to access all this cheap cash, with a hint to investors that they might realize unrealistic returns. For them, it’s just another way to raise capital.

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  • Sun W. Kim

    Your use of varied ranges to calculate the return is confusing. Your example uses APY of 0.50%, but you use 24%. Across four years, 24% is 6%. So, what was your reason for not stating 6%?

    • Well, if you looked into the structure of the product, it’s not necessarily a 6% annual yield — it’s equities-backed and subject to the vagaries of the DJIA. They’re just capping total return at 24% after four years. Why the 0.50% minimum APY then? That’s just how they opted to describe it, it seems. It’s an intentionally confusing product but it’s not as if we mixed up rates and returns here.

  • BAK

    intriguing product. Will be interesting to see how they hedge downside market exposure.