5. Lower costs
According to the latest information available from the Investment Company Institute, the average asset-weighted bond mutual fund expense ratio is 0.48 percent, and it’s 0.18 percent for exchange-traded bond funds. Those figures appear to be reasonable, but in the current low interest rate environment those expenses eat up a substantial portion of the yield generated by the fund’s portfolio, reducing the overall return.
Certificates of deposit have no ongoing expense ratio; therefore, all of the interest paid by the CDs goes directly to the owner.
Unlike many broker-sold bond funds, CDs have no similar sales or redemption charge. However, brokered CDs may have a small transaction fee when bought, or when sold before maturity.
In addition, if a client is selling a CD before maturity or buying one in the secondary market, there may be a spread between the “bid” and “ask” prices offered by the CD market maker. CDs offered directly by banks and credit unions have no sales charges or expenses, but the client will likely incur the aforementioned penalty if redeemed early.