With yields on savings accounts and checking accounts being essentially non-existent, Fidelity (read our review) has introduced Model CD Ladders strategies that offer clients the ability to build simple CD ladders in their brokerage accounts.
A CD ladder can benefit investors looking to generate extra income versus what they can in a savings or checking account. In fact, the FDIC reports savings accounts currently earn an average national rate of.06 percent and checking accounts .04 percent, while a one- and five-year CD ladder on Fidelity.com earns .71 percent and 1.21 percent[i], respectively.
Even though Fidelity is not an FDIC insured bank itself, all of the CDs used in the laddering strategies are insured by FDIC (meaning the US government guarantees them). This is critical as the primary core purpose of sitting cash in a savings account or checking account is to have no risk.
“These CD ladders offer higher rates than typical cash deposits, without compromising on FDIC insurance. Investors can more easily meet their investing income needs with the ladder strategies that suggest the highest yielding CDs among the hundreds available on Fidelity.com each day.” – Richard Carter, vice president of fixed income at Fidelity
Second, by laddering the CDs, clients can maintain relatively stable liquidity which is the other core purpose of maintaining cash in a savings or checking account. Laddering is extremely common in the fixed income market.
Instead of laddering CDs or sitting excess cash in a brokerage account, I park my excess cash in a FDIC insured high yield savings account that earns .99% per year. Full liquidity, guaranteed return. When I need the money, I simply ACH transfer it. That said, not everyone likes having multiple accounts to manage which is where Model CD Ladders strategies come into play.
What’s critical is that Fidelity makes these transactions commission free (unless you opt to not hold a CD to maturity and decide to sell early). If it didn’t, the fees would quickly outweigh the advantages of laddering CDs to begin with.
“Ultimately the Model CD Ladders can help investors think through which of the three models best suit their own personal balance between yield and liquidity. By holding the new issue CDs within the ladder until each matures, the investor will incur no transaction costs for building, implementing, and maintaining their CD Ladder at Fidelity.”
For more information, watch the video below.
Fidelity Investments®’ Model Cd Ladders Strategies Make it Easy to Make the Most of Cash Savings