Get new articles by email:

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning.

Join over 20,000 email subscribers:

Articles are published every Monday. You can unsubscribe at any time.

Brokered CDs: Are They Worth Using?

A reader writes in, asking:

“I am retired and would like to put half of the bond side of my portfolio in CDs. My total retirement IRA is now at Fidelity. I also like to take the ‘lazier approach.’ So my question: What do you think about new or secondary market CDs from Fidelity?”

CDs purchased via a brokerage firm are known as “brokered CDs.” While brokered CDs can sometimes play a useful role in a portfolio, it’s important to understand that they’re meaningfully different from CDs purchased directly at a bank or credit union.

Interest Rate Risk

A major drawback of brokered CDs relative to directly-issued bank CDs is that brokered CDs cannot be redeemed with the issuer. Instead, they must be sold on the secondary market. As a result, they will experience the same sort of interest rate risk (i.e., price volatility) that other bonds do. That is, if you need to sell your brokered CD prior to maturity and rates have increased significantly since the time at which you bought the CD, it’s likely that you’re going to take a loss on the investment (due to the price decline and the bid/ask spread).

In contrast, it’s possible to find directly-issued bank CDs that have almost no interest rate risk because they have low penalties for early withdrawal.

Call Risk

A second potential drawback is that some brokered CDs are callable, meaning the bank has the option to “call” (i.e., force redemption of) the CD at certain times, stated in the CD contract’s terms. This becomes relevant in scenarios in which rates go down after you buy your CD. In such cases, the bank will often call the CD, forcing you to reinvest the money at the new lower rates (if you want to keep the money in some sort of fixed-income investment, that is).

When Can Brokered CDs Make Sense?

Despite their drawbacks, brokered CDs do have one advantage: convenience. Buying brokered CDs is less work than moving money from bank to bank as your CDs mature, in order to get the best rates around. As a result, even though it’s unlikely that you’ll find as good of a deal on brokered CDs as you could find on directly-issued bank CDs, non-callable brokered CDs can still be worth considering if:

  1. You’re the type of investor who places somewhat more emphasis on convenience rather than absolute maximization of portfolio results,
  2. The yield (after subtracting any relevant costs such as commissions) on the brokered CD in question is meaningfully greater than the yield on Treasury bonds with a similar duration, and
  3. You stay under the FDIC limit.

New to Investing? See My Related Book:


Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. The information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2024 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My Social Security calculator: Open Social Security