Charles Schwab’s move to sell fractions of shares could be a ‘game-changer’ for investors

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If you’re still a small-bucks investor and you want to put, say, $100 every month into the SPDR S&P 500 SPY, +0.29%  exchange-traded fund, you’re out of luck.

The ETF, the world’s biggest by assets, sells for $298 a share. At most brokerage houses there’s no way to buy less of it at a time than one share.

But that may be about to change.

Online broker Charles Schwab SCHW, +1.10%  is planning to launch “fractional stock” ownership in a bid to woo younger investors, the company’s founder and president Charles R. Schwab said in a recent interview with The Wall Street Journal. That could make it possible for 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’re always evaluating and working on new services to improve how people can invest, but we don’t have anything specific to share on this right now as far as additional details or timing,” he said by email.

Financial advisers say such moves — by Schwab and other big brokers — is long overdue and could be great news for investors. Newer online brokerage houses have already introduced fractional stock ownership as a way to lure 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, N.Y. “It would be a game changer if you could specify the dollar amount and say, ‘I want to buy, say, $100 of the Gold SPDR,” GLD, +0.24%  he says.

That would be a win for investors who are handling small amounts of money, and for those who want to invest a certain amount of money each month into retirement accounts, he says. It would allow some investors to buy $25 or $50 at a time of individual stocks or ETFs, he says. It could also allow investors to invest, say, exactly $500 a month in one or more ETFs as part of a regular investment plan.

“I think it’s a great idea,” agrees Dennis Nolte, a financial adviser at Seacoast Bank in Oviedo, Fla. “Why wouldn’t you want to buy the S&P 500 ETF when you could buy $25 worth?”

Currently, stocks and exchange-traded funds can only be bought in whole units through most brokers. That means the minimum investment in, say, Amazon AMZN, -0.20%  is the price of a single share, currently more than $1,700. Dow Jones Industrial Average DJIA, +0.17%   component Boeing BA, +1.04%   trades for around $350 a share. Apple AAPL, +1.34%  is more than $230 per share. Tesla TSLA, -0.35%  is more than $250.

Fractional ownership of ETFs could be a big advantage for investors

But the bigger advantage for most investors, say financial planners, is likely to come from fractional ownership of ETFs, which are open-ended mutual funds that are bought and sold much like stocks. Such funds have allowed investors to hold diversified portfolios much more easily. They typically charge far lower costs than traditional actively managed mutual funds.

The Investment Company Institute, which represents the mutual fund and ETF industries, says that although it has already been theoretically possible for ETFs to be traded in fractional amounts, it is not common. Brokers have to set up structures so that ownership can be pooled, and fractional shares can be credited to different customers. Currently the main way fractional shares of ETFs are owned are through dividend reinvestment plans, where investors effectively take an ETF’s dividends in the form of extra partial shares in the fund.

Trouble for traditional mutual funds?

A move to make fractional ownership more widely available could spell further trouble for traditional mutual funds, advisers say. It’s “definitely a threat to mutual funds,” says Nolte. Allowing fractional ownership of ETFs would take away one of those funds’ last remaining advantages over ETFs, which is the ability to invest a specific amount — say $1,000 — at a time.

That is a big reason such funds remain the staple of most 401(k) plans, many experts believe.

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

Exchange-traded funds have seen their net assets quadruple since 2009 as investor money has flowed in. Meanwhile, traditional funds have seen heavy outflows. Equity-focused funds are on track for their fifth year in a row of net redemptions.

ETFs have been taking market share from traditional open-ended funds for many years, the industry reports. That’s meant big savings for ordinary investors, who have swapped funds with average fees of around 1% or more a year for low-cost ETFs whose fees are typically a fraction of that. That has been bad news for money managers, who have seen revenues and profit margins squeezed.