What Is a Fractional CD and Does It Exist?

A Certificate of Deposit (CD) is a savings instrument offered by financial institutions. It allows individuals to deposit a specific sum for a predetermined duration, earning a set interest rate. Upon maturity, the original principal and accrued interest are returned.

Fundamentals of Certificates of Deposit

A Certificate of Deposit is a type of savings account where a fixed amount of money is held for a fixed period, paying a set interest rate in exchange for the commitment. CD terms range from a few months to several years, with the interest rate locked in for the entire duration.

Accessing funds before the maturity date incurs an early withdrawal penalty. This penalty involves forfeiting a portion of the interest earned, which can range from several months to a year’s worth of interest.

CDs issued by banks are insured by the Federal Deposit Insurance Corporation (FDIC), while those from credit unions are insured by the National Credit Union Administration (NCUA). This insurance protects deposits up to $250,000 per depositor, per insured institution, for each account ownership category. The coverage extends to both the principal amount and any interest accrued.

Exploring “Fractional CD” Terminology

The term “fractional CD” is not a recognized or standard financial product in the investment landscape. Certificates of Deposit are purchased as whole instruments for specific principal amounts. Investors commit a defined dollar amount to a single CD, rather than buying a percentage or fraction of a larger, undivided CD.

Any use of the term “fractional CD” stems from a misunderstanding or an informal description. It may be confused with the idea of fractional shares in other investment types, such as stocks, where it is possible to own less than a full share.

Alternative Approaches to CD Investing

While a “fractional CD” does not exist as a product, investors seeking flexibility or diversified exposure often consider several established alternatives. These approaches allow for different ways to manage CD investments without involving fractional ownership of a single CD.

Brokered CDs

Brokered CDs are purchased through brokerage firms rather than directly from a bank. These CDs are still obligations of the issuing bank and are FDIC-insured up to the standard limits. Brokered CDs can offer a wider range of maturities and potentially higher yields than those offered directly by individual banks. Brokered CDs have a secondary market, allowing investors to sell them before maturity without incurring early withdrawal penalties, though the market value may fluctuate.

CD Ladder

A CD ladder is a strategy involving the purchase of multiple individual Certificates of Deposit with staggered maturity dates. As each CD matures, the funds can be reinvested into a new longer-term CD, maintaining a continuous stream of maturing funds. This strategy helps manage interest rate risk and provides periodic access to funds while still benefiting from the higher rates of longer-term CDs.

Fixed-income Mutual Funds or ETFs

Investors interested in broad fixed-income exposure, which may include underlying Certificates of Deposit, might also consider fixed-income mutual funds or Exchange Traded Funds (ETFs). These funds pool money from many investors to buy a diversified portfolio of debt instruments, which can encompass various types of bonds and, in some cases, CDs. When investing in such funds, individuals purchase shares of the fund, effectively gaining fractional ownership of the fund’s entire portfolio. This differs significantly from a CD, as fund shares are not FDIC-insured and their value fluctuates with the market.