Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Do you mean through a brokerage like Charles Schwab?
I'll be interested to hear others thoughts. I've purchased 5 CDs through Schwab's 'select new offerings' group in the last 6 months, all 9 to 18 month in duration . All I've looked for is yield, date they mature and that they are FDIC insured.
@MikeM- I don't see the 'select new offerings' group in the Schwab CD section. I'm probably doing something stupid, as usual. I do see a relatively short list of the highest yielding new CD offerings. Any hints?
If you purchase a CD from a bank on the Schwab list, what happens when it matures? Are the proceeds somehow automatically transferred back to the brokerage account at Schwab, or do they remain in an account at the bank that issued the CD?
This summer I sold my short term corporate bond funds and started buying brokered cd's at Vanguard in my IRA and taxable. I look at the best yield for each time period and try to imagine if at the end of the period I'll be better off than leaving the cash in my settlement account. I check the rates each day and decide what I want to do. I'm really not sure if I am better off with the cd or just leaving it in the money market.
I’ve bought a number of new issues CDs though Fidelity in setting up a ladder. Fido has a large number of offerings. I look for issues that pay interest monthly and avoid foreign banks. The first leg of my ladder is a money market yielding 2.1% right now, with individual CDs maturing about every three months up to two years. Two- year CDs are yielding about 3% right now.
@MFO Members: Some of the best yielding CD's are from bank you have never heard of. Further, there is nothing wrong with foreign bank CD's as long are they have branches in the U.S. which requires them to have FDIC insurance on CD's Regards, Ted
Misspoke @Old_Joe. I was trying to remember the terminology from memory. That never works. Now that I look, I'm just going to 'Schwab CD OneSource'. The "new offering" term I used in my 1st post is actually "New issue" found at the end of the CD description.
If you purchase a CD from a bank on the Schwab list, what happens when it matures?
Joe, that's a good question. I haven't had one mature yet so not sure. I assumed the cash would just go back to the sweep, but I will email my local Schwab financial contact for clarification.
As far as the safety of foreign banks, I think it is up to the individual. All these CD's are FDIC insured, so I don't have a problem with them. I'll admit that given the choice of 2 or more comparable CD's (which is often the case when I've purchased) I will take the US bank over the foreign IF the yield and maturity date is equivalent. So far I have only 1 foreign from a bank in Israel I'm told. To each their own on that one though. I can understand the extra caution I guess.
@Tarwheel, why do you choose CDs that pay interest monthly? I've seen the interest payment choices, monthly, yearly, at maturity... but didn't know why it would matter if the interest is based on the principle amount only. Or am I mistaken on that point? I don't think you make interest on interest, but maybe I'm wrong.
@Old_Joe, per my Schwab financial guy my assumption was correct. At maturity the cash is invested back into the sweep. Thanks for making me look closer at that.
I have avoided foreign banks because of my perception, probably wrong, that returns could be reduced by currency fluctuations— which have destroyed returns for foreign mutual funds. I choose CDs that pay monthly interest so I can reinvest income sooner.
@MikeM- evidently our posts here were being composed simultaneously, so they are a bit out of sequence. I believe that your term "sweep account" is identical to my term "brokerage account". Below is my latest reply to you:
OK, thanks for the clarification on "One-Source". Here's some additional info for you- I've been looking at CD info on the Schwab site, and it appears that no actual "individual" CD account is being established at the issuing bank. Rather, the CD is shown as an asset in your Schwab Brokerage account. At maturity, it transmogrifies from the CD to a cash deposit in the brokerage account. That's a good setup, as it avoids creating "orphan accounts" at a number of other banks.
I'm guessing that Schwab probably establishes one master account at the issuing bank, as a bookkeeping entry, and then subdivides that account at Schwab brokerage into the brokerage accounts of the individual CD holders.
By the way, I downloaded Schwab's detailed info on the setup, and they make a point of stating that they (Schwab) do not assume ANY responsibility for the individual CD: "Each CD constitutes a direct obligation of the Issuer and is not, either directly or indirectly, an obligation of Schwab."
I just bought a CD through "One-Source", and I'll be checking my brokerage account to verify that this setup works as described above. If there's any problems I'll let you know.
I doubt that the CDs are in street name (one master account), because then (I believe) all the CDs in the master account combined would have only $250K worth of FDIC insurance.
If you're drawing interest for cash flow, then monthly interest makes sense. Otherwise you're incurring reinvestment risk by getting monthly interest payments. That can be a plus in a rising rate environment, but is still a nuisance to deal with. FDIC insurance covers accrued interest, so in that sense it doesn't matter whether the interest is actually paid or not. https://www.fdic.gov/consumers/banking/facts/payment.html
Brokered CDs may in theory be tradeable, but then like bonds you're putting principal at risk. Often they do not allow for early withdrawal, even with a penalty. So that's another potential downside of brokered CDs.
I know someone who, during the S&L collapse in the 80s, would buy CDs from Texas banks (where many of the highest interest rates and highest failure rates were). His banks not infrequently failed, but come the next Monday he'd have access to his money that had been moved to a new bank. Personally, I wouldn't be concerned about whether an FDIC-insured bank was based in the US or abroad.
ISTM the main advantage of brokered CDs is that it's easy to add them to an IRA account at a brokerage.
@msf- Thanks for the additional info. You're most likely right on the "master account" issue, but it really doesn't matter to me what the actual mechanism is, as long as the CD is shown as living in our Schwab account rather than in the issuing bank. I wouldn't want to have a whole bunch of different bank accounts to keep track of individually.
For me, the main advantage of brokered CDs is the ability to position deposits in different banks so as to avoid the FDIC insurance limits. Locally we use First Republic (a great bank!), and we're pretty close to the limit there.
Old Joe: I have CDs with Schwab and they are within my SEP-IRA account. They show up in my portfolio the same as a fund, ETF, etc. would. I choose CDs that pay monthly interest, and as someone mentioned, that amount goes into the cash account. When the CDs come due, the principle also goes into the cash account.
So far, Wells Fargo is pretty much at the top for yield, and they pay monthly. I did have a CD (or two?) from a China bank, but when they came due I replaced it with a WF CD.
Comments
I'll be interested to hear others thoughts. I've purchased 5 CDs through Schwab's 'select new offerings' group in the last 6 months, all 9 to 18 month in duration . All I've looked for is yield, date they mature and that they are FDIC insured.
If you purchase a CD from a bank on the Schwab list, what happens when it matures? Are the proceeds somehow automatically transferred back to the brokerage account at Schwab, or do they remain in an account at the bank that issued the CD?
Thanks- OJ
Thanks, Derf
Regards,
Ted
As far as the safety of foreign banks, I think it is up to the individual. All these CD's are FDIC insured, so I don't have a problem with them. I'll admit that given the choice of 2 or more comparable CD's (which is often the case when I've purchased) I will take the US bank over the foreign IF the yield and maturity date is equivalent. So far I have only 1 foreign from a bank in Israel I'm told. To each their own on that one though. I can understand the extra caution I guess.
OK, thanks for the clarification on "One-Source". Here's some additional info for you- I've been looking at CD info on the Schwab site, and it appears that no actual "individual" CD account is being established at the issuing bank. Rather, the CD is shown as an asset in your Schwab Brokerage account. At maturity, it transmogrifies from the CD to a cash deposit in the brokerage account. That's a good setup, as it avoids creating "orphan accounts" at a number of other banks.
I'm guessing that Schwab probably establishes one master account at the issuing bank, as a bookkeeping entry, and then subdivides that account at Schwab brokerage into the brokerage accounts of the individual CD holders.
By the way, I downloaded Schwab's detailed info on the setup, and they make a point of stating that they (Schwab) do not assume ANY responsibility for the individual CD: "Each CD constitutes a direct obligation of the Issuer and is not, either directly or indirectly, an obligation of Schwab."
I just bought a CD through "One-Source", and I'll be checking my brokerage account to verify that this setup works as described above. If there's any problems I'll let you know.
Thanks- OJ
If you're drawing interest for cash flow, then monthly interest makes sense. Otherwise you're incurring reinvestment risk by getting monthly interest payments. That can be a plus in a rising rate environment, but is still a nuisance to deal with. FDIC insurance covers accrued interest, so in that sense it doesn't matter whether the interest is actually paid or not.
https://www.fdic.gov/consumers/banking/facts/payment.html
Brokered CDs may in theory be tradeable, but then like bonds you're putting principal at risk. Often they do not allow for early withdrawal, even with a penalty. So that's another potential downside of brokered CDs.
I know someone who, during the S&L collapse in the 80s, would buy CDs from Texas banks (where many of the highest interest rates and highest failure rates were). His banks not infrequently failed, but come the next Monday he'd have access to his money that had been moved to a new bank. Personally, I wouldn't be concerned about whether an FDIC-insured bank was based in the US or abroad.
ISTM the main advantage of brokered CDs is that it's easy to add them to an IRA account at a brokerage.
For me, the main advantage of brokered CDs is the ability to position deposits in different banks so as to avoid the FDIC insurance limits. Locally we use First Republic (a great bank!), and we're pretty close to the limit there.
So far, Wells Fargo is pretty much at the top for yield, and they pay monthly. I did have a CD (or two?) from a China bank, but when they came due I replaced it with a WF CD.