How to get an even higher CD rate than you see advertised
Higher yields on certificates of deposit are out there, but you’ll have to venture beyond your favorite bank to get them. The Federal Reserve’s interest rate policy appears to be turning toward “higher for longer,” and that has the pleasant side effect of raising annual percentage yields (APY) on an array of deposit products, including CDs. Some online banks are offering yields exceeding 5% on 1-year CDs , a downright windfall when you consider the fact that the average APY on a 1-year CD from all banks was just 1.72% as of the week of Sept. 11, according to Bankrate.com. US1Y US6M 1Y mountain U.S. 1-year and U.S. 6-month Treasury yields Brokered CDs may also give investors another bite at higher yields, with rates exceeding 5.5% for six-, nine- and 12-month offerings, according to Malcolm Ethridge, a certified financial planner and financial advisor with CIC Wealth in Rockville, Maryland. “There could be as much as a 50-basis point difference going to a brokered CD,” he said. “The yield is better because the bank knows it’s competing for the eyeballs of people like me: people who will shop versus the savers they already have relationships with.” Brokered vs. bank offerings With a bank CD, the investor goes directly to the institution to buy the instrument. Brokered CDs are offered via a brokerage and give you access to a broad range of banks, as well as CD terms and yields, to choose from. For instance, brokered CDs purchased via Vanguard begin at one- to three-month lengths and go out beyond 10 years. Rates offered via brokered CDs may be higher than what you’d find if you went directly to the bank, but this isn’t always the case. “The presence of attractive CDs via brokerage doesn’t negate the idea of shopping around to see what’s the best deal,” said Greg McBride , chief financial analyst at Bankrate.com. Bank and brokered CDs are protected by the Federal Deposit Insurance Corporation, which backs individual depositors up to $250,000 per bank, per ownership category. But there are plenty of ways in which these instruments differ. For instance, “breaking” a CD you bought directly from a bank typically means that you’ll forfeit some interest in return for redeeming it before maturity. When you redeem a brokered CD, it must be sold on the secondary market and that can create some risk for the investor, McBride said. The value of the CD will fluctuate with interest rates, with the price declining as yields run higher. “It can be an illiquid market at times, especially if rates have moved against you,” McBride said. “You might get back less than what you had put in.” Further, brokered CDs may come with transaction costs – a fee the brokerage collects for offering access to the array of instruments. They may also have callable features, meaning that the bank can buy back the CD before its maturity date, which can expose you to reinvestment risk if it happens while interest rates are in decline. These should all be considerations in the quest for the best CD. Laddering simplicity Where brokered CDs can come in especially handy is when they’re part of a laddering strategy. This way, you can easily shop for a range of maturities that will fit your plan. Laddering involves purchasing fixed income assets of varying maturities, and reinvesting the proceeds as each term ends. Ethridge has been replacing some of his clients’ traditional fixed income positions with brokered CDs, an option that works for investors who are living on portfolio income. “For cash-heavy clients who would keep that money at the bank, we do ladders of three-, six-, nine- and 12-month CDs,” he said. “They’d rather turn the cash into something more productive while the getting is good.” – CNBC’s Michael Bloom contributed reporting.
