Understanding brokered CDs

Investors often turn to certificates of deposit (CDs) to increase the stability of their portfolios during periods of market volatility. Fixed-income investors are particularly drawn to CDs due to their FDIC insurance, competitive yields and because they can offer shorter maturities, compared to many other investment options.

When considering options for incorporating certificates of deposit into your investment strategy, it's important to understand the differences between bank CDs and brokered CDs, as each offers distinct advantages and considerations. While purchasing a bank CD is the most straightforward way to add CDs to a portfolio, CDs purchased through a broker (brokered CDs) offer more versatility and potentially higher returns—although they also come with additional risks as described below. Brokered CDs are similar to bank CDs in several ways, but they also have some features that resemble more traditional investment products. Here’s what you need to know:

CDs are “cash equivalent” accounts offered by banks. They can be opened as either individual or joint accounts. When you purchase a CD, you deposit a certain amount of money with a bank upfront, and they agree to pay you back at a set annual percentage yield for a set period, no matter what happens to interest rates during that period.

At the end of that term, which can range from one month to several years, you have an option to either withdraw the funds or reinvest them into a new CD under current market terms. Bank CDs are simple and predictable but if you need to access your funds before the maturity date, you may have to pay an early withdrawal penalty, typically equivalent to a few months’ worth of interest.

With an E*TRADE brokerage account, you can purchase a brokered CD. This allows you to: 

• Choose from variety of newly issued or secondary market CDs from banks nationwide.
• Potentially sell your brokered CDs prior to maturity, without paying an early withdrawal penalty, subject to market conditions.
• Build CD ladders by purchasing brokered CDs with varying maturities to help mitigate interest rate risk and generate a predictable income stream.

One other key distinction between bank CDs and brokered CDs is in how they pay interest: bank CDs pay compound interest, while brokered CDs pay simple interest. For more information regarding interest payments please see investor bulletin from the SEC’s Office of Investor Education and Advocacy Investor Bulletin.

As with any financial product, there are benefits and risks to brokered CDs.

One of the primary advantages of brokered CDs is that they may provide more flexibility to investors compared to bank CDs. Instead of being limited to a few options provided by a bank, you can select from a wide array of CDs from many banks, nationwide, that have made their CDs available for purchase through brokerages. That means, you can often find brokered CDs with more competitive rates, different maturities (up to 30 years long), and variable interest rate structures.

Other advantages include:

• Potential for broader insurance coverage: FDIC insurance covers up to $250,000 in CDs per depositor at a given bank held in the same insurable capacity. However, if you purchase brokered CDs issued by different banks, you are eligible for FDIC insurance up to $250,000 per bank held in the same insurable capacity.
  • You must aggregate all deposits that you maintain with the bank by account ownership, including those that you hold at the bank through other intermediaries. There are conditions for obtaining FDIC insurance coverage held through such intermediaries.
• Liquidity: Rather than paying early withdrawal fees to access funds from a CD before it reaches maturity, brokered CD owners may sell their CD in the secondary market, subject to market conditions.
• Diversification: By allocating your investments across CDs from various banks, you mitigate the risk associated with any single bank’s financial instability. This approach reduces the institutional risk if one bank faces financial difficulties.
• Survivor’s options: Most brokered CDs offer estate protection, meaning that if the CD owner dies, their heirs can redeem the CD at face value, regardless of the current market price.
• Streamlined management: If you have multiple brokered CDs through one brokerage account, it allows you to view and monitor all of them simultaneously, without having to log into multiple accounts.

Brokered CDs can involve more complexity than bank CDs. So before investing in brokered CDs, it’s important to understand the risk involved. These include:

For more on the potential risks of brokered CDs, see this investor bulletin from the SEC’s Office of Investor Education and Advocacy Investor Bulletin and E*TRADE from Morgan Stanley Brokered Certificate of Deposit Disclosure Statement.

To help mitigate the above risks, consider purchasing brokered CDs with a plan to hold them until maturity, and to keep your holdings at any given bank (including through any intermediaries) at or below the $250,000 insurance limit.

With predictable returns, brokered CDs are one way to diversity a portfolio using fixed income, especially in times of market volatility. Whether they are an appropriate investment for you will depend on several factors, including the amount you want to invest, your risk tolerance, and your personal financial goals.

CRC# 5041104 (12/2025)