CD rates

Boost Your Returns With Brokered CDs

You can earn more with brokered certificates of deposit, but shop wisely.

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.

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.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit
Tax Breaks

The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit

If you didn't get a stimulus check, or you didn't get the full amount, you may be able to claim the recovery rebate credit on your 2020 tax return.
January 18, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President-elect Joe Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 18, 2021

Recommended

Unhappy with Low CD Rates? A Structured Note May Be the Answer
retirement planning

Unhappy with Low CD Rates? A Structured Note May Be the Answer

What are structured notes? How do they limit risk while allowing for gains? Considering their pros and cons, could a structured note be right for you?…
January 20, 2021
10 New Year’s Financial To Do’s (You’ll Feel Great When You Check Them Off)
retirement planning

10 New Year’s Financial To Do’s (You’ll Feel Great When You Check Them Off)

Once you run through this checklist, you’ll be in great shape for a prosperous and organized new year.
January 18, 2021
Fund Your IRA, Cut Your Taxes
Tax Breaks

Fund Your IRA, Cut Your Taxes

There’s still time to make a 2020 IRA contribution and lower your tax bill.
January 13, 2021
10 Least Tax-Friendly States for Retirees
retirement

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
January 12, 2021