Fed up with the piddling interest you're earning on bank deposits? You may want to take a look at brokered certificates of deposit.
Brokered CDs are issued by banks and sold through brokerage firms such as Fidelity and Vanguard. Some brokered CDs are currently offering yields roughly 0.3 to 0.5 percentage point above what you’d earn on CDs of the same maturity purchased directly from a bank—without a lot more risk.
"Here's an opportunity to stay safe and earn extra return," says Allan Roth, founder of Wealth Logic, an investment advisory firm in Colorado Springs, Colo.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Like direct CDs, brokered CDs are covered by federal deposit insurance. But they're not completely risk-free. If you need your money before the CD matures, you'll have to sell it in the secondary market, and if interest rates climb, the market value of your CD will fall.
Brokered CDs don't always offer higher yields than direct CDs, but longer-term brokered CDs have become more competitive in the past few years, says Ken Tumin, editor of DepositAccounts.com. And in the past six months or so, he says, some shorter-term brokered CDs have also started offering more generous yields. As interest rates rise, "banks might try to hold off on raising direct CD rates," Tumin says, but because brokered CDs are traded in a secondary market, they "tend to respond quicker" to interest rate changes.
When shopping for brokered CDs, skip the ones that are callable. They may offer slightly higher yields, but they allow the bank to terminate the CD early, meaning you may not enjoy that yield for very long.
Also be wary of CDs with unusually high yields, and work with a brokerage firm you trust. The Financial Industry Regulatory Authority warned last year that some firms were using high-yield CD offers as bait to lure seniors into meetings with salespeople, who would then pitch a high-commission product, such as an equity-indexed annuity.
You can buy brokered CDs as new issues, which are typically sold at par, or in the secondary market, where they may trade at a premium or discount to par. Roth, who started adding brokered CDs to client portfolios about two years ago, says he has been finding the best deals in the secondary market.
Looking at noncallable secondary-market CDs offered by Fidelity in mid May, a Capital One CD maturing in May 2022 offered a yield of 2.53%, compared with 2.35% for the top-yielding five-year direct CD listed on Bankrate.com. A Synchrony Bank brokered CD maturing in April 2027 was yielding 2.88%, while 10-year direct CDs offered top yields of about 2.35% and the 10-year U.S. Treasury yielded 2.41%. (Note, however, that Treasury interest, unlike CD interest, is exempt from state and local income tax.)
Rein in Risk of Rising Rates
Buy only brokered CDs that you intend to hold to maturity. Unlike direct CDs, brokered CDs have no early-withdrawal penalty, and in a pinch, you can sell them on the secondary market. But if rates have climbed, you'll likely receive less than what you paid for it.
To mitigate the risk of rising rates, Roth uses brokered CDs in conjunction with direct CDs that have mild early-withdrawal penalties, such as six months' worth of interest or less. If rates rise, he can break the direct CDs and reinvest at a higher rate.
For savers who are spreading cash among multiple banks to stay below the Federal Deposit Insurance Corp. limit of $250,000 for each type of account you hold at each bank, brokered CDs can make life simpler. You can hold brokered CDs issued by many different banks in one brokerage account. But FDIC coverage on secondary-market brokered CDs has one wrinkle: It only applies to the par value. So if you buy a brokered CD at a premium, that premium amount won’t be FDIC-insured.
If you're not spending the interest from your brokered CDs, you should regularly reinvest it. Unlike direct CDs, brokered CDs don't offer the option of adding the interest back into the principal, so you'll want to redeploy that cash to keep it from building up in a low-yielding brokerage sweep account.
-
Senior LIving and Memory Care Facilities Are ImprovingHere are the best senior living communities in 2024, according to a J.D. Power survey.
-
Like the ETF? Check Out the Cheaper CloneName-brand ETFs are offering lower-cost, higher-returning versions of their famous funds. For long-term investors, they might be a better deal.
-
October CPI Report Hits the Mark: What the Experts Are Saying About InflationCPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are SayingFederal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Jobs Growth Stalls Amid Hurricanes and Strikes: What the Experts Are SayingJobs Report A dismal October payrolls print supports the case for a slow and steady pace of rate cuts.
-
CPI Report Points to Gradual Pace for Rate Cuts: What the Experts Are Saying
CPI Inflation surprised to the upside last month but the disinflation trend remains on track.
-
Strong September Jobs Report Puts Soft Landing in Sight: What the Experts Are SayingJobs Report A blowout reading on nonfarm payrolls takes another jumbo-sized cut to interest rates off the table.
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
