Investors may have heard of certificates of deposit (CDs) issued by banks, but they may not know that credit unions have a comparable fixed income product. Known as credit union share certificates (CUSCs), they can be sold and held by brokerage firms just like brokered CDs. Here's more about share certificates.
What is a share certificate?
A share certificate (or brokered CUSC when sold and held by a brokerage) is a lower-risk investment that has much in common with a CD. Just as CD holders earn interest, share certificate holders earn dividends (or regular payouts). But the investor's initial deposit, called the principal, is tied up for a set period, called the term. The investor then receives the principal back when that term runs out.
How does a share certificate work?
A share certificate works similarly to a CD. When investors buy a share certificate, they agree to tie up the purchase amount for a preset period (typically from 3 months to 5 years; terms for Fidelity's CUSC offerings tend to range from 6 months to 3 years). In exchange, investors receive a fixed rate of return.
CUSCs pay dividends, a way of sharing profits with credit union members. When the set period ends, investors can reinvest the funds into another share certificate (similar to a CD ladder strategy), transfer to another account, or withdraw it. Withdrawing before the term ends may result in loss.
Rates of return depend on term length and credit union earnings, among other factors. In general, the longer the term, the higher the rate.
Also like a CD, share certificates can be callable. That means the issuer can return your principal before the term expires, which would mean you can't earn further dividends. Share certificates can be non-callable too, meaning the issuer can't return your principal before the term ends.
To purchase a share certificate directly from a credit union, investors must belong to the issuing credit union. Some credit unions have member eligibility requirements, such as living in a certain area, though some credit unions allow anyone to apply for membership. Or an investor can buy a brokered CUSC through a brokerage, like Fidelity, which is currently the only brokerage to offer CUSCs to retail clients online.
Share certificate vs. CD
Share certificates and CDs share many commonalities, but there are a few key ways they're different.
Key similarities to a brokered CD
- Both pay a set rate at the time of purchase that's usually higher than what a standard savings account would offer
- Both are insured up to $250,000 (per account owner, per issuer, per ownership category) by either the Federal Deposit Insurance Corporation (FDIC) for CDs or the National Credit Union Administration (NCUA) for CUSCs.1
- Both generate taxable income
- Both can be purchased from brokerages (though brokered CUSCs are currently only available for retail clients from Fidelity)
Key differences from a brokered CD
- Instead of paying interest like banks, credit unions distribute earnings in the form of dividends.
- While accrued interest is covered by the FDIC for CDs, if a credit union fails, the NCUA isn't mandated to cover earned but not yet paid dividends. Some credit unions pay out dividends monthly and quarterly; others pay out at the end of the term.
- A credit union board may delay the issuer from paying out a dividend when there are insufficient earnings available after required reserves. CD interest isn't subject to such delays.
Benefits of brokered CUSCs
Brokered CUSCs have some benefits that appeal to investors:
Flexible term lengths
You can choose to lock up your money for short or medium term lengths—whatever makes sense for your financial goals and time horizon.
Convenience
Because you may buy a brokered CUSC (or CD) where you already have investment accounts, you can keep everything in one place, which may help simplify management and organization.
Insurance
Each CUSC is NCUA-insured up to $250,000 per issuer, per account type, and you can increase total coverage by buying CUSCs from different issuers.1 You can hold CUSCs in your brokerage account and in your IRA.
Low risk
CUSCs have a similar risk profile as CDs, which is low because of insurance protection, a fixed return rate (provided you don't withdraw before your term expires), and predictable returns.
Potentially higher returns
Returns can be higher than bank savings accounts. Further, CUSC returns are generally similar to brokered CDs.
Low barrier
If you buy a CUSC from Fidelity you don't have to apply for membership at a credit union.
Disadvantages of brokered CUSCs
Coverage limits
NCUA insurance covers CUSCs up to the applicable coverage limits of $250,000 per account per covered institution. If a sole account owner has more than $250,000 in principal in a single account at a single institution and that institution fails, the investor would likely not get their full principal back.
Lower potential return
Because of the low risk, short-term nature and fixed returns, yields on CUSCs tend to be lower than potential returns of higher-risk investments.
Call risk
The issuer of a callable CUSC can redeem the security on a set date prior to maturity and pay back the CUSC's owner either par (full) value or a percentage of par value. The call schedule lists the precise dates for when an issuer may choose to pay back the CUSCs and the price. You can avoid this risk by purchasing call-protected, aka non-callable, CUSCs.
Changed value if you sell before maturity
If you need access to your money before your term ends, you may be able to sell your CUSC back to the issuer. But it may be subject to a markdown2,3,4 (or charge), and it may be worth less or more than you think. One reason its value may change is because of interest rate changes. Rising interest rates make fixed-income products like CUSCs with lower rates of return fall in value because investors can easily find an alternative with a higher rate of return; falling interest rates increase their value.
No secondary market
While brokered CDs are available for purchase in the secondary market on Fidelity's website, Fidelity does not currently offer CUSCs on the secondary market. That means if you want to redeem your CUSC before your term ends, you're limited to having your issuer buy it back from you. Fidelity has an online bid process for customers to indicate they want to sell. Other buyers aren't an option as they are with CDs.
Credit risks
Since CUSCs are similar to loans to the issuer, there is a risk that the issuer might not be able to pay them back. (Insurance offered by the NCUA may help mitigate this risk.) In other words, do your research about the issuing institution and the CUSC itself, so you know they're reputable and you have a greater likelihood of getting back your principal when your term ends.
Dividend payment risks
When a credit union doesn't have sufficient earnings available after required reserves, its board may delay or prohibit the credit union from paying dividends to CUSC holders. This hasn't happened often, but because it can happen, it's wise to be aware.
Insolvency of the issuer
If the issuer approaches insolvency or becomes insolvent, as in, it doesn't have enough money to pay its debts, the CUSC may be placed in regulatory conservatorship, with the NCUA typically appointed as the conservator. As with any deposits placed in conservatorship, the issuer's CUSCs may be paid off prior to maturity or transferred to another institution. This could give you the choice between keeping your CUSC but receiving a lower rate of return or cashing out its current value.
No auto roll option
There's currently no equivalent Auto Roll service for CUSCs at Fidelity. If you want to reinvest proceeds from a maturing CUSC, you must review current offerings and place a new order.
Should I buy a brokered CUSC?
Any investment decision depends on your trading plan or investment strategy, which takes into account your objectives, time horizon, and risk tolerance, or willingness to deal with potential losses. Whether you choose a CUSC issued by a nonprofit credit union, a CD issued by a for-profit bank, or some other investment is a matter of personal preference. Short-term investments, like CUSCs and CDs, can help diversify a portfolio. That's because they're considered lower-risk investments, and investors may want a portfolio with investments with different levels of risk.
How to buy a brokered CUSC
If you've decided to buy a brokered credit union share certificate at Fidelity and are a current customer, here's how to do it:
- Check out the list of available CUSCs on Fidelity.com
- Click any offering to see the yield (APY), maturity date, minimum investment, pay frequency, and whether the CUSC is call-protected, among other details
- Once you determine which CUSC to purchase, click Buy
- Choose which account you'd like to hold the CUSC and how many you’d like to buy
- Preview your order
- Place your order
If you are not yet a Fidelity customer, you could open an account, such as a taxable brokerage account. You'll need to confirm your identity and employment, create a username and password, and transfer money into your account. Then you'll be able to buy a CUSC via that account.