The financial landscape of 2023 has seen a substantial increase in wealth for those with substantial cash reserves. Interest rates have reached their highest in 22 years, enabling savings accounts and money market funds to offer up to 5% APY, essentially risk-free annual returns.
However, a change is on the horizon as rate cuts are expected, which will reduce the interest earned on savings. One strategy to secure current rates for a longer duration is through Certificates of Deposit (CDs). CDs operate similarly to risk-free loans to banks, offering a fixed, more competitive interest rate in return for locking in capital for a set period.
Since the Federal Reserve's rate hike in March 2022, CD rates have surged, with one-year CDs hitting a ten-year peak of 1.85% APY in November 2023. Online banks such as Barclays and Alliant Credit Union are currently offering high-yield CDs with terms ranging from 6 to 60 months and returns as high as 5% APY.
While these CD rates don't surpass the S&P 500’s average annual return of approximately 9.3% (or its 19% return this year), they do offer a hedge against inflation. This makes them an attractive option for those with considerable cash reserves looking for market diversification or wary of market volatility.
Nonetheless, the landscape is shifting:
- Despite the rapid growth of high-yield CD rates in 2022, the momentum has slowed in 2023. As of October 2023, only three CD terms experienced rate increases.
- Many high-yield CDs offering up to 6.5% APY have either vanished or shortened their terms recently, indicating their transitory nature.
Investors now face a dilemma with the anticipated decrease in rates: whether to lock in current yields or to invest in an S&P 500-linked ETF like the SPDR S&P 500 ETF Trust (NYSE:SPY), which has historically outperformed. For those more bullish, a Nasdaq 100-linked ETF such as the Invesco QQQ (NASDAQ:QQQ), up 47% this year and nearing its all-time high, might be worth considering.
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