Cash may be king in this market, but decent yields are hard to find. Even if you shop around, the best rates hover around 4 percent—barely enough to beat inflation. Reach for a higher yield and "you'll have to make a trade-off somewhere, particularly if you're dealing with large amounts of money," says Oliver Tutt, managing director of Newport, R.I.-based Randall Financial Group. Treasuries present the ultimate in safety, but the pay is meager: The one-year bill currently yields just 1.1 percent, and the five-year, 2.2 percent. Even risk-averse investors can do better than that without surrendering security. Here are five places to park your cash for a decent return:
Money market bank accounts. Bank products currently offer the best of the lot in terms of payout, while still providing some security, says Greg McBride, senior financial analyst at Bankrate.com. Currently, the top-yielding money market accounts from banks are paying 3.2 percent and higher; meanwhile, the highest-yielding money market mutual fund is paying 2.6 percent. "Bank money market accounts not only trump what the best money funds are paying in terms of returns, but they also offer the protection of Federal Deposit Insurance Corp. insurance and supply needed liquidity access to the money," says McBride. That insurance covers up to $250,000 per person, per institution.
Certificates of deposit. They seem stuffy and old-fashioned, but CDs are looking relatively dashing these days. With these investments, you trade liquidity—or easy access to the money—for a fixed interest rate over a set period. For example, if you're willing to lock up your cash for one year, Wachovia has a 4.3 percent payday, and Capital One Direct Banking pays 3.9 percent. Commit to a five-year CD, and you're looking at a 5 percent return. But remember, yields on longer-term CDs are more attractive because you risk the possibility that interest rates will rise during that time. CDs offer risk-free FDIC protection.
High-yield online savings accounts. Because there's no need to pay for branch real estate or bank tellers, Internet-based banks have low overhead, which means they're able to offer more competitive rates than traditional banks. Another bonus is convenience: With 24-hour-a-day bank access, you can execute a transaction at midnight if you choose. The best-yielding online savings accounts currently pay rates of around 3.3 percent, according to Bankrate.com. Just like traditional walk-in banks, online savings banks are FDIC insured.
Bond ETFs. Investors looking for greater transparency—that is, a window into the daily holdings of their fund—may want to consider exchange-traded funds that track a bond index. (If you're planning regular contributions or withdrawals, though, be sure to check the trading fees associated with ETFs before investing.) Tom Lydon, president of Global Trends Investments and coauthor of the book iMoney: Profitable ETF Strategies for Every Investor, recommends playing it safe with treasury ETFs for now, such as iShares Lehman 1-3 Year Treasury ETF (ticker symbol SHY), which currently yields 3.3 percent. It's not federally insured, but because its holdings are backed by the U.S. government, investors should sleep well, Lydon says.
Municipal bond funds. For those in the upper tax brackets, municipal bonds are a good bet. With munis, investors get the benefit of tax-free income, less volatility than corporate bonds, and theoretically more safety. Currently, Vanguard's Short-Term Tax Exempt fund (VWSTX) pays 2.8 percent, which equates to a 3.9 percent yield for an investor in the 28 percent federal tax bracket. Its Intermediate-Term Tax Exempt fund (VWITX) pays 4.2 percent, a tax-equivalent yield of 5.8 percent. Munis come in ETF form, too: The iShares S&P National Municipal Bond fund (MUB) currently yields a tax-equivalent 5.7 percent.