As the line between brokerage accounts and bank accounts continues to blur, it’s important for savers to remember that they don’t have to move their money into bank accounts to get the safety and returns of a bank account. Savers can achieve similar types of low-risk returns offered by traditional banks and banking products without ever leaving their brokerage accounts.
As brokerage accounts and bank accounts begin to look more alike, savers can often do many of the same things in each account. In brokerage accounts, not only can you invest in stocks, bonds and funds, you can often use the account as an omnibus financial account. In other words, you can typically write checks and pay bills with your account, often while collecting interest too.
How to use a brokerage for your savings needs
1. Keep your deposit in cash at your broker
Savers can stash their cash in a brokerage and rack up interest in a money market fund. Typically brokerages sweep any excess cash into a basic money market fund, allowing you to collect some extra coin. For example, TD Ameritrade offers 0.04 percent on balances up to $5,000, ranging up to 0.43 percent on much higher amounts. Meanwhile, Charles Schwab offers an Federal Deposit Insurance Corp. (FDIC)-protected account for investors with a 0.34 percent yield.
Those options aren’t bad, though they don’t get you a whole lot more interest than a basic savings account at one of the large banks. If you want to step up to a better deal, you should look at Interactive Brokers, which offers a rate that’s more competitive with those at top banks.
Interactive Brokers will pay 1.63 percent (as of September 2019) on balances above $10,000. The catch is that you must have at least $100,000 in equity value in order to get the full rate. Otherwise, the interest is prorated based on your account size. In whichever case, the broker doesn’t offer any interest on the first $10,000 in cash in the account.
Just like a bank’s savings accounts, the offered rates at Interactive Brokers will move up and down based on the prevailing moves of interest rates. And cash up to $250,000 is protected by the Securities Investor Protection Corp. (SIPC), though the broker adds on further coverage.
2. Buy an ETF of short-term government bonds
If you want to get your whole account balance working at an even higher rate, then you might consider buying an exchange-traded fund (ETF) comprised of short-term federal government bonds. These ETFs offer a yield that’s in line with short-term interest rates, and the bonds in the fund are short-term, typically less than a year in duration. The bonds are backed by the federal government, the same entity backstopping the FDIC guarantees on bank accounts.
If you’re interested in this kind of investment, you can purchase it just as you would a stock or other security, by placing an order with your broker using the fund’s ticker symbol. You’ll pay an annual fee called an expense ratio based on how much you have invested in the fund.
For example, one such fund is the Goldman Sachs Access Treasury 0-1 Year ETF (GBIL). The fund tracks short-term interest rates, so as they rise and fall, the return on the fund does as well. About three-quarters of the fund’s bonds mature in less than six months, and since they’re U.S. bonds, they’re considered as safe as an investment gets.
The bond’s yield to maturity is 1.89 percent, as of September 2019, and the fund’s expense ratio is 0.12 percent, or a cost of $12 annually for every $10,000 invested. That’s about $1 per month for every $10,000 that you have invested, and that’s a reasonable price for such a fund.
Because interest rates are so low these days, it’s important to look for a low-cost fund so that you keep more of your interest earnings.
3. Buy a money market mutual fund
Going with an ETF is one way to use funds to make your brokerage account look like a bank account. Another way is buying a money market mutual fund backed by bonds of the federal government. Both accomplish similar goals with similar (very limited) risks. So you might opt for this kind of mutual fund, or otherwise choose it when access to an ETF is not available.
Like the ETF bond fund, this kind of money market mutual fund invests in very short-term bonds of the federal government, typically with an average maturity of 30 to 60 days. So the fund tracks short-term rates, and as they rise and fall, the fund’s yield will change as well. Again, these bonds are backed by the federal government, so these are as risk-free as bonds get.
One example of this money market mutual fund is the Vanguard Federal Money Market Fund (VMFXX). As of early September 2019, it offered a yield of 2.06 percent, and the average maturity of a holding was just 34 days. The fund charges an expense ratio of 0.11 percent, or a cost of $11 annually for every $10,000 invested. That’s just under $1 per month for each $10,000 invested.
If you’re interested in this kind of investment, you can purchase it as you would any mutual fund. That means there’s typically a minimum investment for the initial purchase – the Vanguard fund has an initial minimum of $3,000, for example – but then you can add to your position incrementally. Again, look for a low expense ratio so that you can keep more of that interest in your own pocket.
4. Buy a brokered CD
If you’re looking for a high-yield savings option from within your brokerage, consider turning to a CD. Yes, you can buy a brokered CD from your brokerage account. A brokered CD is like a bank CD in that it pays a contractually guaranteed rate of interest. In other respects, a brokered CD differs from a bank CD, especially in how it is bought and sold.
A brokered CD has several key differences that any prospective investor should know. Brokered CDs can be purchased at new issue through an online brokerage, and will usually have a small commission charge. They’re typically available with a minimum investment of $1,000 and are available in $1,000 increments. Some brokered CD products may not offer FDIC protection, so it pays to check first before buying.
If you need to close the CD for some reason, you’ll have to sell it into the market, like you would with a bond or stock. Therefore, you may not receive the full value for the CD, if interest rates have risen. On the other hand, if rates have fallen, you may realize a higher-than-expected gain. But if you hold to maturity, you’ll receive the contractually agreed on payments and full value.
Those buying a brokered CD will want to look at the commissions in order to minimize costs.
5. Set up a cash management account at a robo-adviser
If you already have a robo-adviser account or are looking for a high-yield cash management account, then turning to a robo-adviser could be a great option. Two of the largest independent robo-advisers have both been clamoring for new deposits and they’re offering attractive yields.
Robo-advisers Wealthfront and Betterment are now offering interest rates that are competitive with the best online banks. As of September 2019, Betterment is offering 2.38 percent for its savings account, about 24 times better than the national average savings account rate of 0.1 percent. Plus, you won’t pay an advisory fee and will get FDIC coverage on up to $1 million in cash.
It’s a similar situation at Wealthfront, which offers 2.32 percent for its cash account. You’ll also get up to $1 million in FDIC coverage, and won’t pay an advisory fee on cash in the account. You can get an account set up quickly, and easily move money around to different accounts.
Then if you’re ready to invest with the robo-adviser, you can move money to a fee-charging investment account and get started. A robo-adviser is an excellent choice for cash savings.
If you’re looking to earn the return of a high-yield savings account with the (near-) security of a bank, you have quite a few options to make it work with your brokerage account. Using a brokerage account to do your banking can also help you consolidate your financial life with one provider, and it may offer other benefits in terms of simplicity and convenience.
- Here are the best robo-advisers
- How to save money: 21 savings tips
- Here are the best CD rates right now
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.