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Home / Business / Charles Schwab's transition to selling fractions of shares could be a "game-changer" for investors

Charles Schwab's transition to selling fractions of shares could be a "game-changer" for investors



If you're still a small investor and want to put, say, $ 100 each month into the SPDR S&P 500

SPY, + 0.29%

exchange traded fund, you are out of luck.

ETF, the world's largest of assets, sells for $ 298 per share. In most brokerage houses there is no way to buy less of it at a time than a stock.

But that may be changing.

Net Broker Charles Schwab

SCHW, + 1

.10%

plans to launch "fraction shares" in an effort to woo younger investors, said the company's founder and president Charles R. Schwab in a recent interview with The Wall Street Journal . This can enable individual investors to buy shares in companies and exchange traded funds, in smaller or exact dollar amounts.

Schwab spokesman Michael Cianfrocca declined to comment further. "We are always evaluating and working on new services to improve how people can invest, but we have nothing specific to share on this right now, as far as further details or timing," he said via email.

Financial advisers say that such moves – by Schwab and other major brokers – are long overdue and may be good news for investors. Newer brokerage houses on the web have already introduced corporations as a way to attract younger retail investors.

"This could potentially be a" game-changer, "says Peter Palion, a certified financial planner at Master Plan Advisory, Inc. in East Meadow, NY." It would be a game changer if you could specify the dollar amount and say: & # 39; I want to buy, say, $ 100 from Gold SPDR, & # 39;

GLD, + 0.24%

he says.

It would be a benefit for investors who handle small amounts of money, and for those who want to invest a certain amount each month in retirement accounts, he says. It will allow some investors to buy $ 25 or $ 50 at the same time as individual stocks or ETFs, he says. It can also allow investors to invest, for example, exactly $ 500 a month in one or more ETFs as part of a regular investment plan.

"I think it's a good idea," says Dennis Nolte, financial advisor at Seacoast Bank in Oviedo, Fla. "Why wouldn't you buy the S&P 500 ETF when you could buy $ 25 worth?"

At present, equities and exchange traded funds can only be purchased in entire units through most brokers. That means the minimum investment in, say, Amazon

AMZN, -0.20%

is the price of a single stock, currently more than $ 1,700. Dow Jones industrial average

DJIA, + 0.17%

component Boeing

BA, + 1.04%

trades for around $ 350 per share. apple

AAPL, + 1.34%

is more than $ 230 per share. Tesla

TSLA, -0.35%

is more than $ 250.

Fractional ownership of the ETF can be a big advantage for investors

But the bigger advantage for most investors, says economic planners, probably come from fractional ownership of ETFs, which are open equity funds that are bought and bought sold just like shares. Such funds have made it easier for investors to have diversified portfolios. They usually charge much lower costs than traditional actively managed mutual funds.

The Investment Company Institute, which represents mutual funds and ETF industries, states that although it has been theoretically possible for ETFs to be traded in fractions, it is not common. Brokers must set up structures so that ownership can be pooled and fractions can be credited to different clients. At present, the main form of fractions of ETFs is owned through dividend reinvestment plans, with investors effectively taking ETF's dividend in the form of additional equity shares in the fund.

Trouble for traditional mutual funds?

A move to make Fractional ownership more widely available can spell further problems for traditional mutual funds, advisers say. It's "definitely a threat to mutual funds," says Nolte. Letting fractional ownership of ETFs take away one of the fund's last remaining benefits over ETFs, which is the opportunity to invest a specific amount – say $ 1,000 – at a time.

There is a major reason why such funds remain the basis of most 401 (k) plans, many experts believe.

Stock exchange traded funds, which you buy and sell on the stock market, remain much smaller than traditional stock funds, which you buy or sell directly from the fund manager. According to the Investment Company Institute, traditional funds have approximately $ 16.6 trillion in net assets, not including money market funds. The figure for ETFs is under $ 4 trillion.

Exchange-traded funds have seen their net worth quadruple since 2009 as investor money has poured in. Meanwhile, traditional funds have seen large outflows. Equity-focused funds are on track for their fifth consecutive year of net redemptions.

The ETF has taken market shares from traditional open funds for many years, reports the industry. This means big savings for ordinary investors, who have exchanged funds with an average fee of around 1% or more per year for low ETFs that have a fraction of this. There has been bad news for money managers, who have seen revenue and profit margins squeezed.


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