Americans are increasingly bullish about investing with purpose. According to a report by the US SIF Foundation, the total value of professionally managed assets held in accounts using socially responsible investing (SRI) strategies reached $12 trillion at the start of 2018 — a 38% increase from two years early. That’s about 25% of all assets under professional management in the United States.
And it’s not just those willing to pay professional money managers getting in on the action. Small-dollar, DIY investors enjoy a growing portfolio of SRI options.
Worthy Bonds is among the most interesting of these options. It’s a niche platform that offers only one instrument: a 36-month coupon bond sold in $10 increments. Bond proceeds benefit small businesses and nonprofits, not corporate issuers or government treasuries. It’s a variation on peer-to-peer lending, without the high-interest personal loans.
Rigid purchase limits and the lack of investment diversity all but ensure Worthy Bonds will remain a complement to, rather than the focal point of, your core investing strategy. But with no platform fees or penalties for early withdrawal and a flat 5% rate of return, Worthy Bonds is a compelling alternative to short- and medium-term savings instruments, including certificates of deposit — despite Worthy accounts’ lack of FDIC insurance.
Intrigued by Worthy Bonds’ potential? Read on for more about its features, advantages, drawbacks, and overall suitability for retail investors.
Here’s what to expect from Worthy Bonds.
Worthy Bonds are SEC-registered bonds available for purchase by individual investors in $10 increments. Worthy invests all bond sale proceeds in asset-backed (secured) small-business loans.
Worthy’s business borrowers generally use these loans to fund short-term investments like inventory purchases, and they repay with interest on a 36-month term. Worthy doesn’t disclose rates charged to business borrowers, but all bonds produce a flat 5% annual return (coupon rate) for Worthy’s peer investors. Because all bonds are backed by tangible assets, investors’ risk of loss is relatively low on any given bond. However, Worthy advises that defaults do happen, and the lack of FDIC insurance limits investors’ recourse.
Worthy Bonds carry no fees or hidden expenses. Like all traditional lenders, Worthy makes money through its rate spread — the difference between the (higher) interest rate charged to business borrowers and the (lower) rate paid out to individual bondholders.
Worthy Bonds imposes strict numeric limits on bond purchases: no more than $100,000 (10,000 bonds) for accredited investors and no more than 10% of the greater of annual income or net worth for nonaccredited investors.
The SEC defines accredited investors as:
- Individuals who earned at least $200,000 in annual income in the two tax years prior and reasonably expect similar or higher earnings in the coming year
- Couples who earned at least $300,000 in the two tax years prior and reasonably expect similar or higher future earnings
- Individuals or couples with a net worth greater than $1 million
Worthy Bonds offers several different account types:
- Taxable accounts (interest is taxable as ordinary income)
- Tax-advantaged retirement accounts (traditional, Roth, and rollover IRAs)
- Tax-advantaged health savings accounts (HSAs)
Manual and Scheduled Bond Purchases
Once you’ve set up your Worthy Bonds account and linked an external funding account, you can manually purchase bonds in any amount (subject to total purchase limits). You can also set recurring bond purchases in fixed amounts on a weekly, biweekly, or monthly schedule.
If you prefer, you can use the proceeds from rounded-up transactions in your linked funding account to automatically purchase Worthy Bonds. Round-ups always go to the next dollar, meaning a $3.50 purchase produces $0.50 in additional capital. Round-ups transfer to your Worthy Bonds account via Dwolla, a payment transfer app, and trigger a new bond purchase whenever your balance reaches $10.
Cash-Out and Interest Withdrawal
Worthy Bonds allows interest-only withdrawals and principal cash-outs at any time during the 36-month term, with no early withdrawal penalties. Larger withdrawals may take several weeks to process, but smaller interest-only withdrawals typically execute quickly.
Worthy Causes uses Worthy Bonds’ round-up feature to donate bonds to nonprofit organizations. When you sign up for Worthy Causes, proceeds from rounded-up purchases made in your linked external account fund bond purchases in $10 increments.
Those bonds are then transferred to your choice of participating nonprofit organizations, entitling them to a 5% annualized rate of return and full cash-out authority. If you’ve chosen a qualified tax-exempt nonprofit organization, your bond donations may be tax-deductible for state and federal income tax purposes if you itemize deductions.
For each successful referral, Worthy Bonds pays both parties — the referrer and referred — one bond at the standard $10 face value. When the gifted bond is held to maturity, the total referral value for each party is $10 plus 36 months’ interest at a 5% annualized rate.
Here’s what Worthy Bonds has going for it.
- Built for Low-Dollar Investors. Worthy Bonds is designed for everyday investors. With bonds priced at just $10 apiece, it’s easy for bondholders of limited means to dip their toes into the water here.
- No Fees to Bondholders. Worthy Bonds doesn’t impose any fees on bondholders. Instead, it earns money by charging borrowers more than it pays bondholders — a standard lending arrangement.
- Solid Rate of Return on All Bonds. Worthy Bonds always yield 5% annualized. That’s significantly higher than savings and CD yields, though Worthy Bonds are riskier than those FDIC-insured instruments. Perhaps more importantly, Worthy’s yields are less volatile than savings yields. Per Worthy, they’re not subject to change with benchmarks like the Federal Funds Rate or 10-year U.S. Treasury rates — though they’re not guaranteed to remain fixed at 5% forever.
- No Penalties for Early Cash-Out. There’s no penalty for cashing out your bond’s principal before the 36-month term expires. That’s a big advantage over some corporate and government bonds, which may have call restrictions, and on CDs that charge early termination penalties.
- Several Tax-Advantaged Account Options. Worthy Bonds offers IRAs and HSAs, two account types with significant federal and state tax benefits. You can open a traditional, Roth, and rollover IRA here, making Worthy an appropriate landing place for retirement assets transferred from employer-sponsored accounts after separation.
- Easy to Withdraw Accrued Interest. It’s easy to create a reliable income stream by regularly withdrawing accrued interest from your Worthy account. As with early principal withdrawals, there’s no penalty for doing so.
- Supports Small-Business Owners. Every Worthy Bond supports a small-business owner who might otherwise struggle to find competitive financing — not a billion-dollar corporation or government treasury with bottomless borrowing power.
- Round-Up Feature Increases Bond-Buying Power. Worthy Bonds’ round-up feature is a great way to reduce the cash flow impact of your fixed-income investments while keeping your overall savings rate up. When you invest via Worthy Causes, your round-ups may also be tax-deductible (though you won’t earn any interest on the bonds).
Consider these drawbacks before opening an account with Worthy Bonds.
- Accounts Aren’t FDIC-Insured. Worthy Bond accounts aren’t insured by the Federal Deposit Insurance Corporation. It’s the platform’s biggest drawback relative to traditional bank- or credit union-based savings vehicles, and it definitely justifies the higher coupon rate.
- Purchase Limits Apply to All Investors, Including Accrediteds. Worthy Bonds limits bond purchases by any individual investor to $100,000 in cumulative face value. Nonaccredited investors must abide by even lower investment limits: 10% of annual income or net worth. These rules will almost certainly hinder socially conscious investors seeking significant fixed-income exposure. Fortunately, plenty of other reputable SRI options exist for income-seekers.
- No Way to Buy Corporate or Government Bonds. Unlike traditional brokerages and some newer fintech solutions, Worthy Bonds doesn’t sell corporate or government-issued bonds. Those instruments may carry lower risk, offer higher returns, or deliver certain tax advantages that boost net return.
- Returns May Be Less Competitive in a Higher-Rate Environment. Although inflation has been low for years, economic conditions are always subject to change. In general, fixed-income investments suffer during prolonged periods of high inflation, and Worthy Bonds’ seemingly rigid returns may do worse than most.
Worthy Bonds is a great way to invest in bonds that support local business owners who desperately need working capital, rather than massive corporations or governments that already have plenty.
Strategy-wise, Worthy Bonds is a nice place to park short- and medium-term savings at higher yields than you’re likely to earn at any traditional or online bank — though you must understand the risks inherent in bond investing and the implications of no FDIC insurance.
Worthy Bonds even delivers tax advantages, thanks to multiple tax-advantaged account types (including HSAs, a relative rarity in the DIY investing space) and Worthy Causes’ charitable giving option.
All in all, Worthy Bonds is a fun little niche product with big potential. It’ll be interesting to see how it develops and whether it comes to serve as a model for other socially responsible fixed-income platforms.
Do you invest in Worthy Bonds? Are you satisfied with the process and your returns, or do better fixed-income options exist?