Your CDs Feel Safe. The 1.5 Percentage Points of Income They're Not Paying You Aren't.

CDs provide FDIC-guaranteed principal but require inflexible lockup periods that can force investors to accept early withdrawal penalties when cash is needed. CD laddering can improve liquidity, but Treasury bill ladders can offer similar benefits with greater flexibility and easier trading. CD interest is taxed as ordinary income at full marginal federal and state rates, which can reduce the effective yield versus advertised rates. For capital preservation with liquidity and potentially better tax efficiency, short-term municipal bonds can be considered. The iShares Short-Term National Muni Bond ETF (SUB) tracks thousands of municipal bonds with an average duration of about 1.82 years, which limits interest-rate sensitivity. The portfolio’s credit quality is described as strong, with large portions rated AA and AAA, though the ETF price can still fluctuate.

"I have never really been a fan of certificates of deposit (CDs). Yes, the principal is guaranteed and insured by the Federal Deposit Insurance Corporation (FDIC), but the lockup period is extremely inflexible. If I need emergency cash or dry powder to buy the dip, I do not want my money trapped behind an early withdrawal penalty."

"They are often pitched as a safe place to park cash, but once you start building CD ladders to get around the liquidity problem, I start asking why not simply use Treasury bills instead. Treasury bill ladders accomplish much of the same thing while generally remaining more flexible and easier to trade."

"The other issue is taxes. Interest earned from CDs is treated as ordinary income and taxed at your full marginal federal and state income tax rates. Depending on your tax bracket, what you actually keep after taxes can end up being meaningfully lower than the headline rate advertised by your bank."

"If your goal is capital preservation with some income potential while still maintaining liquidity, one ETF worth considering is the iShares Short-Term National Muni Bond ETF (NYSEARCA: SUB). This ETF tracks a benchmark of 2,843 municipal bonds with an average duration of just 1.82 years. Duration measures sensitivity to interest rates, and at under two years, SUB is fairly resistant to rate volatility compared to longer-term bond funds."

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