bank rates

Rising Rates Create Deals In Brokered CDs

We couldn’t help but notice that brokered CDs are staging a comeback this summer.

Brokered CDs are simply bank CDs that you can buy, hold and sell within an account at a brokerage firm such as Vanguard or Fidelity, in the same way you hold stocks, bonds and mutual funds in these accounts.

Over the past several years, the returns on those CDs have almost always lagged what you could earn by investing directly through the top-paying banks on our CD Rates Leaderboard.

So we’ve been surprised over the past few weeks to see a growing number of 3- and 5-year brokered CDs that beat the best nationally available yields.

And when you’re lucky enough to find that, well, it’s like having your cake and eating it, too.

BROKERED CD RATES VS. TOP RETAIL RATES
Recently available from Vanguard and/or Fidelity

Bank Term (months) APY Not Available In
Top National Retail Yield 36 1.54%
American Express Centurion Bank 36 1.65% OH, TX
Ally Bank 36 1.60%
Capital One Bank 36 1.60% CT, DC, LA, MD, NJ, NY, VA
Comenity Capital Bank 36 1.60% OH, TX
Discover Bank 36 1.60%
Top National Retail Yield 60 2.27%
American Express Centurion Bank 60 2.35% OH, TX
Discover Bank 60 2.30%

If you have a rollover IRA or other retirement account, you likely already have a brokerage account that allows you to buy these certificates of deposit.

Just as with CDs purchased directly from an issuing bank, brokered CDs stipulate a rate of return and a fixed maturity term. Keep the principal invested for the full duration of the agreement, and you’re guaranteed to earn the stated yield.

And just like certificates bought directly, brokered CDs are fully insured by the FDIC, up to the same $250,000 limit per investor, per institution.

Lastly, if you choose brokered CDs that are “new issue,” you’ll be able to buy and redeem them commission-free, just as with a bank CD. (Also look for non-callable certificates when choosing a brokered CD, which means the bank can’t decide to terminate your CD early.)

Beyond the similarities, though, brokered CDs offer some useful advantages over bank certificates as well as one primary risk.

Housing multiple CDs in a single brokerage account adds a significant dose of ease, convenience and manageability that not only makes life simpler but can translate into financial gains for your portfolio.

That’s because no matter how many CDs you own in your brokerage account, you’ll receive one statement for the whole lot, which will clearly state the details of each certificate. This makes it easy to see when certificates are approaching maturity and to evaluate the current array of your yields and terms.

Having all of this information in one place, along with the ability to easily buy or redeem any CD in your account through one uniform process, greatly simplifies your ability to ladder a CD portfolio that maximizes liquidity and yields.

It also enables you to diversify across banks and current rates, while still keeping your FDIC insurance coverage maximized to $250,000 for each issuing bank represented in your brokerage account.

In contrast, the process of buying and tracking certificates from a multitude of banks – each with their own transaction processes and paper trails – can be daunting at best and inefficient or mistake-prone at worst.

So, with some brokered CDs now paying higher yields than you can get directly from a bank, what’s the catch?

The primary difference between owning a bank CD and a brokered CD comes into play if you opt to cash in the certificate before its maturity date.

Banks handle this by charging an early-withdrawal penalty, typically the last 6 to 12 months worth of interest. This means you can easily calculate, right at the time you purchase a CD, exactly what its redemption value will be at any point of early withdrawal.

Brokered CDs offer no such certainty. Instead of redeeming your certificate according to a fixed penalty calculation, brokered CDs are sold on the secondary market.

Exiting early requires offering the not-yet-mature CDs for sale through your brokerage firm, receiving bids from other brokers and deciding whether or not to accept the best market price.

In other words, prices are driven by investor demand, which is heavily influenced by where interest rates are headed. So if you need to sell during a period of increasing rates, you could potentially lose some of your principal.

But if you feel confident about being able to hold your certificates to full term, or are comfortable with the risk, these current leaders among brokered CDs offer a substantial upside to savers investing in a diversified CD portfolio.

Don't miss out on the next bank deal. Get the newest deals delivered straight to your inbox!

Comments (2)
1 Star2 Stars3 Stars4 Stars5 Stars (3 votes, average: 5.00 out of 5)
Loading...
2 Existing Comments
  1. James K said:
    on June 28th at 05:56 pm

    Where is there a link/url to Vanguard and Fidelity in order to see all the banks where one can buy a bank CD through Vanguard and Fidelity? And rates, if available, for those bank CDs. Thanks

  2. Mike Sante said:
    on June 30th at 09:11 am

    Here they are…

    https://personal.vanguard.com/us/FixedIncomeHome

    https://www.fidelity.com/fixed-income-bonds/cds