Disadvantages of a Structured CD Investment

Structured CDs should protect you from stock market fluctuations.

Structured CDs should protect you from stock market fluctuations.

A structured certificate of deposit is a relatively new way to save your money. Like a regular CD, you deposit your money for a fixed period of time and can't get it back without paying a penalty until that period expires. A structured CD does not give you a fixed interest rate like a traditional CD. Instead, funds used to purchase it are invested in such a way that your earnings increase when the market rises and do not suffer when the market falls. Structured CDs might sound attractive, but they have some disadvantages.

Opportunity Cost

When you put your money in a structured CD and the stock market goes down, you don't earn anything. Money invested in a regular CD would continue to earn interest during the same period. While you don't lose any actual money in the structured CD, you do lose the opportunity to make money even if the market goes down.

Unclear Return Calculations

Issuers of structured CDs usually claim that you get the same return that you would receive if you put your money in the stock market or in whatever other index they track, but they can calculate those returns in different ways. If the stock market crashes the day before you cash out your CD, you could lose your entire return if it is calculated on a point-to-point basis. Other structured CDs are calculated on an averaged basis, which means that you might not get the full benefit if your index skyrockets at the end of your holding period.


With a traditional CD, you can usually withdraw your money early by paying a penalty to the institution from which you purchase it. Structured CDs are based on contracts that are locked in for long periods of time. To get your money out of them early, you usually must go back to the investment bank that created the structured CD. It will determine the present value of your CD, and it might be less than you expect.

Risk of Loss

Structured CDs typically have a component that is insured by the Federal Deposit Insurance Company. As long as your principal sits in an FDIC-insured account, it is protected up to $250,000. Your returns are usually invested in complicated derivative securities, however, and it those securities fail, you could end up losing your profits. In addition, many structured CD underwriters farm the money in the CDs out to many different banks. If some of the CD money ends up in an institution that is not FDIC-insured, you could lose it.

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