We've been fielding a lot of questions from readers about "variable CDs", "flexible rate CDs" or "indexed CDs". It seems that several banks and credit unions have been heavily promoting these products, and we have learned that they may now be appearing on the top of rate tables on some websites.

Make no mistake, a variable rate Certificate of Deposit (also perhaps called a flexible rate CD or an indexed Certificate of Deposit) is an absurd product for anyone to purchase and should be avoided at all costs.

The entire purpose of a Certificate of Deposit, versus a savings or money market account, is to lock in an interest rate over a period of time. At a time like the present where interest rates are at multi-year highs, depositors are wise to lock in some of their money at a guaranteed interest rate for 2, 3, 4 or 5 years in order to guard against the possibility that interest rates reverse course and come back down quickly. (Since Certificates of Deposit carry an early withdrawal penalty, depositors should not put money in a CD that they may need before maturity, especially since banks may have terms allowing them to refuse early withdrawals).

While the very nature of a CD is to lock in an interest rate and guard against falling rates, a variable CD is precisely designed by the issuing bank not to achieve that goal, but nonetheless to lock in the depositor.

I looked at the 3-year variable CD product being offered by Valley Bank. This product is geared to pay 0.10% APY above the current upper limit of the Fed Funds rate (currently 5.50%). If the Fed Funds rate falls, you will be earning less than the advertised rate after the next reset. Equally vulnerable is a Flex Index CD offered by Merchants Bank of Indiana which is tied to a 2.75% margin below the Prime Rate.

Compare CD rates here.

At the same time as we caution against variable CDs, we recognize that variable savings accounts do not bear the same risk. Ivy Bank, for example, offers an Indexed Savings account that resets monthly based on the 1-Month US Treasury rate and that currently yields 5.66% APY. Savings accounts like Ivy Bank's offer depositors the advantage of higher savings rates, but depositors aren not locked into a long-term CD with the prospect of lower rates should the index fall.

Compare savings rates here.

Bottom line: We do not list variable rate, indexed rate or flexible rate CDs on BestCashCow, and we strongly encourage depositors to consider fully the risks of these products before investing in them.

1-Year Certificate of Deposit offerings remain quite strong. As of the date of this article, there are at least 8 online 1-year CDs being offered at 5.15% or higher. Depending on where you live, you will probably also find 1-year CDs from local banks and credit unions at or above this level. Banks are competing for your money, especially if you are willing to forgo liquidity for one year.

At the same time, US Producer Price Index (PPI) and US Consumer Price Index (CPI) data released last Thursday and Friday indicated that inflation may be below 5%. As a result, market participants have begun to price in an increased likelihood that the Fed will cut the Fed funds rate below its current 5.00 to 5.25% target before the end of 2023. US Treasuries with maturities in May 2024 are now trading at yields between 4.70% and 4.75%.

Even for those in the highest tax brackets in New York City or California where state and local taxes can total 10%, one-year US Treasuries are going to net less after tax than 1-year CDs. Plus, 1-year CDs allow the opportunity to diversify holdings in case of a catastrophic US government default (although it is possible that banks could be equally or more impacted in a default so you should always stay below FDIC limits).

For those willing to go out 18 months or more, the advantage of CDs can be even more attractive. BestCashCow shows at least a handful of 18-month CD offerings at or above 5.00% and US Treasuries maturing around November 15, 2024 are now yielding below 4.35%.

Those owning full-service brokerage accounts at institutions like Morgan Stanley have probably received calls this week from their brokers. In addition to calming you down about the crisis around the banks, many of these brokers’ calls are designed to pitch you on brokered CDs with attractive 1 year (or longer) rates. Those with online brokerage accounts can also see brokered CDs offerings through the interface.

The problem with many of these brokered CDs is that they are being issued by banks that you had not heard of before the collapse of Silicon Valley Bank and Signature Bank. Your only familiarity with these banks may come from their names crossing the CNBC tickertape every three minutes showing that the stocks are down something like 15 to 20% in the day.

Even if you are staying within FDIC limits, buying these brokered CDs is not a no-brainer. It is actually a fairly risky proposition.

A savings account or CD opened directly with a bank is insured to FDIC limits and your funds are made available the following day by the FDIC after a bank closure or sale.

A brokered CD, unlike an account opened directly with a bank, is ordinarily not held directly in your name. It can take weeks or even months for the FDIC to review the brokerage ledgers and make you whole up to FDIC limits. In the event of a bank failure, you are not only not getting the high interest rate you had been offered but you are losing the time value of money just waiting to recover your principal.

Even in the event that a failed bank is acquired in a transaction arranged by the FDIC, the acquiring bank may chose not to assume brokered CDs.

It all seems especially silly to chase brokered CDs from distressed institutions when you realize that you can lock in great CDs directly from banks that aren’t distressed today, where you are more likely to get the rate for the full term and where you also get your funds up to FDIC limits the next day in the unlikely event of a failure.

Direct bank CDs also offer clear and transparent early withdrawal terms (versus brokered CDs where you need to sell to the market if you need your money before maturity).

Compare today’s best online CD rates here.

See CD rates where you live here.