This New Product From Wealthfront Could Be Better Than 5% CDs

Now that the best savings accounts and CDs are paying 5.00% APY or higher, people have more options for how to earn yield on your cash savings. But don't assume that you're limited just to the traditional, typical bank accounts. Some innovative companies are now offering new types of financial products to help you earn higher returns on your cash savings that can be even better than the best CDs.

Wealthfront is one of The Motley Fool's Ascent's picks for best robo-advisors. But along with giving people low-cost ways to buy stocks or earn 5.00% APY with the Wealthfront Cash Account, this company has launched another new product (as of May 7, 2024) to help you earn higher returns on your cash. It's called the Wealthfront Automated Bond Ladder, and it's promising potential yields of 5.10%-5.26% variable APY (after Wealthfront's 0.25% annual advisory fee).

Let's learn more about why the Wealthfront Automated Bond Ladder could be a better place to put your savings than the best CDs.

How the Wealthfront Automated Bond Ladder works

The Wealthfront Automated Bond Ladder makes it easy to invest in bonds -- specifically, in U.S. Treasuries. The bond ladder works in a similar way to a "CD ladder" -- you buy multiple bonds with multiple maturities, so you can try to maximize your yield over time.

But traditionally, investing in bonds can be confusing. As a robo-advisor, Wealthfront's Automated Bond Ladder takes the work off your to-do list, and makes bond investing automatic. The Wealthfront software automatically analyzes hundreds of Treasuries, chooses bonds based on your time horizon and goals, and automatically reinvests the interest and rebalances your bond portfolio. And because this product only invests in U.S. Treasuries, it's very low risk (U.S. Treasuries are backed by the full faith and credit of the U.S. government) and it delivers steady yield.

The Wealthfront Automated Bond Ladder lets you choose an investment time horizon of six months to six years. If the Federal Reserve cuts interest rates soon, investing in bonds today can help you lock in higher yields for a longer duration. And no matter what happens with interest rates, Wealthfront can help you maximize your yield with professional management of your bond investments.

Tax advantages of U.S. Treasury investments

Some people might look at the current average yield of the Wealthfront Automated Bond Ladder (5.10%-5.26% variable APY after fees) and wonder if it's really such a good deal. After all, the best CDs, savings accounts, and money market accounts are paying 5.00% APY or more.

Here's the difference: the Wealthfront Automated Bond Ladder has special tax advantages. Interest that investors earn from U.S. Treasuries is exempt from state and local income tax. (You still have to pay federal income tax.) So if you're a higher-income earner in a state that charges income tax (like California or New York, for example), investing in U.S. Treasuries could help you keep more of the yield on your cash savings.

With a typical bank savings account, you have to pay federal, state (and possibly local) income tax on your interest income. Wealthfront's Automated Bond Ladder could end up giving you a higher yield than even the best CDs and savings accounts -- when you compare your "take-home" yield after state income tax.

Wealthfront Automated Bond Ladder: Use it for short-term to medium-term savings

When interest rates were at zero, it didn't make much sense for most people to open a CD or invest in bonds; there was no yield, no income. But now that interest rates are perhaps likely to stay at 4%-5% or more for a while, investors have more options for fixed income and earning yield on cash. The Wealthfront Automated Bond Ladder can be a good choice for your short-term or medium-term cash savings.

Consider using this product to invest money that you don't need tomorrow for an emergency, but that you're trying to use to generate yield, without risk of loss. If you're saving for a dream vacation, a wedding, a house down payment, or any other goal with a six-month to six-year timeframe, the Wealthfront Automated Bond Ladder could be better than the best CDs. Investing in U.S. Treasury bonds can give you higher yields than the best CDs, especially if you can benefit from state income tax breaks.

Bottom line

The Wealthfront Automated Bond Ladder is an intriguing new bond investment product from one of the best robo-advisors. If you can commit your cash for six months to six years, you want to earn higher yields than the best CDs, and you live in a state where you can benefit from state income tax breaks, investing in U.S. Treasuries with Wealthfront can be a powerful new way to earn higher returns on your cash.