Understanding brokered CDs

Investors often seek a balance between achieving an attractive yield on their investments and maintaining portfolio risk characteristics they’re comfortable with. While weighing their options, some investors remain heavily allocated in cash and miss out on generating low-risk, short-term returns. To overcome this scenario and generate meaningful income for their portfolios, many investors are turning to the stability and value of brokered certificates of deposit (CDs). Let’s take a look at the benefits and risks associated with CDs and the resources E*TRADE from Morgan Stanley makes available to clients interested in this product.

In order to finance their lending activities, banks often issue certificates of deposit (CDs). When you purchase a CD, you are agreeing to deposit your funds with a bank for a specified period commonly referred to as a “time deposit.” During this period, the funds will earn a stated rate of interest until maturity. That interest is usually paid to the investor at regular intervals during the term of the CD, which can range from one month to several years. Generally speaking, the longer the term, the higher the stated interest rate. Upon maturity, the full value of the initial deposit will be returned along with any accrued interest due.

You may have heard of multiple types of CDs, such as traditional CDs offered by banks or brokered CDs. Like bank CDs, brokered CDs are debt obligations of the issuing bank; however, with brokered CDs the issuing bank has decided to make these instruments available via third-party intermediaries, like E*TRADE from Morgan Stanley.

Brokered CDs and bank CDs share many characteristics, but there are a few key differences you should be aware of—namely insurance coverage, early withdrawal penalties, and liquidity.

As the vast majority of banks are FDIC members, most CDs feature federal deposit insurance coverage up to $250,000 per depositor, per insured bank.† Since brokered CDs can be purchased from multiple issuing banks and held in your E*TRADE account, you have the ability to essentially garner additional FDIC protection by diversifying your CD positions across multiple issuers.

†All brokered CDs available on etrade.com feature FDIC insurance coverage to applicable limits.

Investors should also be aware of any potential early withdrawal fees and liquidity considerations for their CD investments. When purchasing a traditional bank CD, investors may be subject to early withdrawal fees assessed by the bank if they elect to withdraw their funds prior to maturity. However, brokered CDs give investors the opportunity to sell their CDs prior to maturity on the secondary market, offering enhanced liquidity.

Let’s uncover some additional benefits associated with brokered CDs.

Competitive yields:

Conservative investors who’ve traditionally sought low-risk debt solutions may be surprised at the competitive yields today’s brokered CDs offer. In recent years, some investors have considered riskier alternatives to achieve satisfactory yields, but many are finding that new brokered CD issuance is providing attractive rates.

Structure variety:

There are a wide variety of features to consider when investing in brokered CDs, depending on your investment goals. E*TRADE offers access to both new issue and secondary market offerings of brokered CDs from hundreds of different issuing banks. With terms ranging from as short as three months to as long as 30+ years, you can invest according to your liquidity needs. Brokered CDs also have a variety of redemption and interest features to consider. While fixed-rate CDs are the most common form, other interest rate structures offer additional flexibility, including zero-coupon, step-up rate, or floating-rate CDs. In addition to interest rate features, CDs have callable or non-callable redemption options.

Estate protection:

Most brokered CDs offer estate protection, more commonly referred to as a “survivor’s option” or “death put” provision. This feature allows for the investment to be redeemed at face value, regardless of the current market price, upon death of the account holder.

Preservation of capital:

If one of your primary objectives is to avoid capital loss, CDs are a popular asset class to consider thanks to the availability of short terms and FDIC insurance coverage.

Diversification:

This conservative investment product may help diversify your portfolio and add stability during volatile market periods.

Like other investments, there are certain risks associated with investing in CDs. Let’s delve deeper into some of these risks and potential ways to mitigate them.

E*TRADE offers an array of tools and resources to assist you in searching for the right CD to align with your investment needs.

CD search tools:

Finding the right CD investment is easy. For quick searches, consider the “Yield by Category” search table on the Bond Resource Center homepage. To further tailor your search, use our Advanced Bond Screener to take advantage of a broad range of customizable criteria.

Bond Ladder Builder:

A bond ladder is a portfolio of fixed income securities that mature at regular, staggered intervals. Whether you are looking to support ongoing cash flow needs or fund a large purchase in the future, a CD ladder can help generate income based on your unique situation. Take advantage of our Bond Ladder Builder for step-by-step guidance through the bond ladder building experience.

Fixed Income Specialists:

E*TRADE offers clients complimentary access to our Fixed Income Specialists. These highly experienced professionals can provide additional information around the benefits and risks associated with Brokered CDs. To learn more about this investment, contact a Fixed Income Specialist today at 877-355-3237.