In its latest efforts to attract a younger group of investors, online broker Charles Schwab recently announced it will soon allow its clients to trade fractions of stocks, the founder and chairman told the Wall Street Journal in an interview. This is the latest offering by the brokerage firm, which recently slashed its commissions on trades from $4.95 to zero.
“I think this is setting the new standard for brokerages in the space. It’s commission free and fractional shares,” said Dave Nadig, managing director of ETF.com, on CNBC.
Many ETFs have now been offered commission free as well, as brokerage platforms are working more closely with exchange traded fund providers in offering commission-free trades to help build tactical asset allocation strategies without extra costs. Now investors looking to use ETFs are wondering if it will help them diversify portfolios as well.
“What does that do for ETF investors? Well obviously it gives you a lot more flexibility. Right? If there is an ETF out there with $150 price and you want a half a share, now you’ll be able to do that. It certainly makes managing a more balanced portfolio easier at smaller asset levels. But I think the interesting question is: what does this change about the dynamics of the whole industry? ETFs traditionally haven’t had any presence in 401(k)s because of the fractional share problem. You can’t dollar cost average your $200 out of your paycheck across ten ETFs. It doesn’t work. Now it could work. So I think I could open up that market,” Nadig explained.
Nadig does recognize that with this move, Schwab also potentially sets itself up for other opportunities.
“The flip-side is, this is a big open in for a so-called direct indexing—-folks that want to put together portfolios not of ETFs, but of individual stocks that look like index investments. That’s where I’d expect Schwab to go next,” said Nadig.
The goal of the Schwab promotion is to make it easier to purchase more exorbitant stocks like Apple, that may be out of reach for many younger investors.
“Schwab has been quite focused on younger customers for some time, but we’re sure it’s also been watching the success some of the other free trading platforms have experienced and moving in line on fractional share trading makes sense,” Devin Ryan, managing director at JMP Securities, said in an email.
Some experts see this move toward attracting younger investors as a bit hasty however, as they already have stock purchase options at lower price points.
“I would push back a little bit in the sense that, you know, so the mutual fund has been handling fractional shares for a while. So it’s good that the ETF ecosphere is now kind of catching up to that. I do think that there’s something about younger millennial‘s that want to buy, you know, half a share of Google and Facebook. Right now if they have $100, they could basically buy one share of 87% of the Russell 3000 index. So you can get most of the Russell 3000 index without having to deal with fractional shares. Look it’s a net positive overall. But I don’t think it’s going to encourage more younger millennial investors that want to invest in half share of Facebook,” said John Davi, founder and CIO at Astoria Portfolio Advisors.
Watch the CNBC segment ‘Schwab’s move to fractional investing could be huge for ETF issuers and investors, experts say’ below:
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