One Big Reason You Should Invest in Brokered CDs Right Now

When you think of certificates of deposit (CDs), you might think of the ones offered by banks. But if you have a brokerage account, another type of CD might be available to you -- one with potentially greater upside: brokered CDs.

Brokered CDs share many similarities with the best bank CDs. They have term lengths, come with maturity dates, protect your investment with FDIC insurance, and grow your money by an interest rate. But whereas banks only sell the CDs they issue themselves, brokerages buy CDs from dozens of different banks and repackage them for sale. Often the broker buys them in bulk, so it gets a discount, which translates into a higher APY for clients who want to invest in them.

With CD rates likely having already peaked, now is the time to start investing in them. But there is one big reason you might want to choose brokered CDs over bank CDs: You could resell them in the future for potentially big capital gains.

You can sell brokered CDs on a secondary market

Unlike bank CDs, brokered CDs don't have early withdrawal penalties. Instead, if you want to cash out your CD before maturity, you have to sell it on a secondary market. Depending on the value of your CD at the time of sale, this could translate into a profit (or loss) for you.

For example, a 5-year CD with a 4.75% interest rate might look valuable at a time when the best CDs are paying out at 0.50%. Conversely, if you have a 5-year CD with a 0.50% interest rate, you might have to sacrifice some of your principal if you wanted to sell it at a time when CD rates were above 4.75%.

In general, secondary CD values will fluctuate with ongoing CD rates and changes in the economy. When interest rates start to rise, the value of any outstanding CDs will gradually decline, which could translate into a loss if you were to sell one on a secondary market. Conversely, when interest rates start to fall, some of your outstanding CDs may start to look more valuable, especially if your CD rate is several percentage points above ongoing rates.

That makes today's brokered CDs an interesting investment opportunity. Though interest rates are still high compared to previous years, it's unlikely the Federal Reserve will keep them this high for much longer. Already, the rates on many short-term CDs have started to fall, including those on brokered CDs. If there was ever a good time to invest in brokered CDs, it might be now, as you can still lock into a 5% APY on a brokered CD with a decent term.

For a potentially more lucrative investment, I would take a look at brokered CDs with longer terms, like 3 to 20 years. These CDs will not only let you lock into today's high rates for a longer period, but potentially give you a valuable investment if interest rates fall back to decimals. You would be in a good place if you had a 10-year CD paying out at 4.75% while ongoing CD rates had fallen back to 1.00% or less.

Lock into a high APY before it's too late

If you're interested in investing in brokered CDs, the following four brokerages sell them with competitive APYs and varied term lengths:

• Fidelity
• Charles Schwab
• Vanguard
• Edward Jones

To be sure, brokered CDs don't have unlimited upside potential, like stocks or ETFs. If you invest $10,000 in a 10-year CD with a 4.75% interest rate, you'd earn $475 each year for a total of $4,750 after 10 years. Investors want to make money, too, so you're unlikely going to sell this CD for, say, $20,000, if the maximum upside is only $4,750.

Even so, investing in brokered CDs could be an interesting strategy for 2024, especially if you're already interested in buying CDs. You could earn some interest now, then sell your CD for a modest gain. Take a peek at some of the brokerages mentioned above and snatch up some high-yield CDs before this opportunity passes.