CD's: Bank vs Brokered

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SwissCoffee
Posts: 3
Joined: Thu Feb 13, 2020 8:48 am

CD's: Bank vs Brokered

Post by SwissCoffee » Thu Feb 13, 2020 9:42 am

Hi ,

I'd like to ask for help understanding the Vanguard page for investing in CD's .

Ive read several posts on the forum in which people talk about investing in CD's and post a link to an external site which is often a Bank CD. But I see in the Vanguard site there is a tab which lists 88 'brokered' CD's from multiple sources.
What are the reasons to use the Vanguard brokered CD's vs a Bank CD?

From the 'search CD' page, brokered CD's come with a lot of confusing information (ex: "Yield to worst bid" ??) vs the typical bank CD which lists only: maturity time and rate. A quick search on Vanguard for 5 year CD's shows a maximum yield of 1.9% but a search thru Bankrate_com shows a 5 year CD at 2.3%.
Why would anyone invest in the brokered CD's offered by Vanguard other than to keep things under one roof, the bank CD's seem to offer higher rates, are simpler to understand and have a 'stable market value' ?

The below is from the Vanguard site, explaining the differences, I'd like to hear what others consider the most important reasons to invest in one type or the other.

Bank CDs:

Can only be held by the issuing bank.
Do not have CUSIP numbers.
Interest is compounded.
Interest penalties if redeemed prior to maturity.
May "roll over" into another CD at maturity.
FDIC-insured.
Stable market value.

Brokered CDs:

Offered by banks and sold through brokerage firms.
Have CUSIP numbers.
Similar to bonds.
Simple interest paid directly to Vanguard money market fund.
Traded in a secondary market.
Receive all accrued interest if sold prior to maturity.
Can be sold prior to maturity in the secondary market.
Does not "roll over" into another CD at maturity.
FDIC insured.
Fluctuating market value.

Thanks !

MarkVH0518
Posts: 76
Joined: Tue Dec 13, 2016 2:14 pm

Re: CD's: Bank vs Brokered

Post by MarkVH0518 » Thu Feb 13, 2020 11:14 am

I'll share my thoughts.

- The top CD rates in the US are usually with credit unions, so you must figure out how to become eligible for membership and then transfer the money.
- Sending in tax and identification papers to banks and credit unions is a hassle perhaps not worth the trouble for .5% interest
- Getting your money back from the financial institution takes a couple weeks as well, again not worth the trouble to me.
- I've never found I want to reinvest in the same institution once the CDs mature (I've been using 5 year CDs)

- Having CDs at your brokerage institution means you don't need to create a new account certifying tax info and identification.
- Once the CDs mature, the money is automatically available in your cash account
- Not having dividends reinvested in a high rate CD is a loss in these low interest rate times.
- being able to sell a CD in the open market can be useful, but you will pay a transaction cost.

- For what it's worth after using a 5 year CD ladder for several years, I've decide to simplify and just use general bond fund.
My favorite is the Vanguard ETF BND. I expect to let my CDs mature and not to sell them, but I won't be buying any more.
BND probably pays more. CDs with FDIC insurance are probably safer. But I've decided that limitations on even brokerage CDs are not worth the trouble.

Regards,
Mark

sport
Posts: 8812
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: CD's: Bank vs Brokered

Post by sport » Thu Feb 13, 2020 12:02 pm

The "confusing" information relates mostly to CDs that are trading in the secondary market. If you limit your search to new issue CDs, things are more straightforward. For those, you get the stated yield for the specified time period.

One big difference I have found is what happens when a CD matures. For many direct CDs, the attractive CD rate is a "special" rate. When the CD matures, it will automatically rollover into a new CD at the "standard" rate. Of course, the standard rates are not good rates, so you really have to be paying attention. In my experience, you generally have about one week to take the money or choose another CD before the auto rollover happens. OTOH, when a brokered CD matures, the money goes into your settlement fund. It will sit there, earning settlement fund interest until you decide to move it.

alex_686
Posts: 5292
Joined: Mon Feb 09, 2015 2:39 pm

Re: CD's: Bank vs Brokered

Post by alex_686 » Thu Feb 13, 2020 12:10 pm

Note, the “stability” aspect of bank CDs are a bit of a illusion. Brokeraged CDs are marked-to-market daily do you can see the price fluctuate. Bank CDs are not, so you don’t see the price movement. It is still there.

sport
Posts: 8812
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: CD's: Bank vs Brokered

Post by sport » Thu Feb 13, 2020 12:22 pm

alex_686 wrote:
Thu Feb 13, 2020 12:10 pm
Note, the “stability” aspect of bank CDs are a bit of a illusion. Brokeraged CDs are marked-to-market daily do you can see the price fluctuate. Bank CDs are not, so you don’t see the price movement. It is still there.
However, with a bank CD, you cannot lose more than the early withdrawal penalty. You also cannot gain more than the stated yield.

rivercrosser
Posts: 84
Joined: Thu Oct 31, 2019 3:48 pm

Re: CD's: Bank vs Brokered

Post by rivercrosser » Thu Feb 13, 2020 3:51 pm

One advantage of brokered CD's is if you have them in a IRA you can have them all FDIC insured by choosing different banks within one brokerage account. No way to get over the $250,000 limit at most regular banks (unless they are in a CDARS network) and be fully insured.

jmk
Posts: 565
Joined: Tue Nov 01, 2011 7:48 pm

Re: CD's: Bank vs Brokered

Post by jmk » Thu Feb 13, 2020 10:43 pm

SwissCoffee wrote:
Thu Feb 13, 2020 9:42 am
Why would anyone invest in the brokered CD's offered by Vanguard other than to keep things under one roof, the bank CD's seem to offer higher rates, are simpler to understand and have a 'stable market value' ?
At the moment, you are correct, and Bank CDs make the most sense if you can handle the hassles. But not too long ago, brokered secondary CDs at Vanguard paid higher yields than bank CDs! At other times, ibonds paid more than either. So you just have to compare and then shop accordingly.

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: CD's: Bank vs Brokered

Post by Alan S. » Thu Feb 13, 2020 11:19 pm

jmk wrote:
Thu Feb 13, 2020 10:43 pm
SwissCoffee wrote:
Thu Feb 13, 2020 9:42 am
Why would anyone invest in the brokered CD's offered by Vanguard other than to keep things under one roof, the bank CD's seem to offer higher rates, are simpler to understand and have a 'stable market value' ?
At the moment, you are correct, and Bank CDs make the most sense if you can handle the hassles. But not too long ago, brokered secondary CDs at Vanguard paid higher yields than bank CDs! At other times, ibonds paid more than either. So you just have to compare and then shop accordingly.
I agree. Yields on brokered CDs vs. those from banks and CUs are cyclical. About a year ago, the advantage shifted toward the bank CDs and brokered CD yields began to decline faster than banks. Many people are willing to give up a few basis points for the convenience of brokered CDs, particularly on IRA accounts, but right now you are giving up too much in most cases.

Right now, many of these CDs that were issued near the interest rate peak a couple years ago are maturing and probably many of them will vacate the brokered CD market.

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