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May 6, 2020, 6:39 a.m. EDT

Schwab’s plan to offer fractional shares starting in June is a shot across the bow at Robinhood, Stash

Will fractional share trading usher ETFs into 401(k) plans?

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By Mark DeCambre, MarketWatch


MarketWatch photo illustration/iStockphoto

Discount brokerage Charles Schwab on Tuesday announced that it will offer trading in fractional shares of individual stocks as soon as June, delivering on a promise made by its founder back in October, while providing competition for microbrokerages like Robinhood and Stash who have drawn an increasingly younger demographic.

Some analysts believe the advent of fractional share trading could also pave the way eventually for exchange-traded funds to be used in retirement plans like 401(k)s, typically the domain of mutual funds.

Schwab /zigman2/quotes/201281754/composite SCHW +0.57% said it would allow investors on its platform to own partial shares for as little as $5 starting June 9, with investors able to buy a so-called stock slices, or up to 10 different companies at once for $0 commission.

A spokesman for Schwab, Michael Cianfrocca, described the program, known as “Schwab Stock Slices,” as “a significant development in the effort to make investing more accessible — in particular for people getting started with investing who might want to trade smaller dollar amounts of stocks regardless of their share price.”

The program will initially be available only for S&P 500 index stocks.

The move by Schwab comes after its 82-year-old founder told the Wall Street Journal back in October that it wanted to attract a younger clientele who are unable, or reluctant, to plow thousands of dollars into a single company.

Shares of some popular megacap companies on the Nasdaq-100 index /zigman2/quotes/210598364/realtime NDX +1.37% , for example, costs hundreds or even thousands of dollars apiece, including Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -1.67% , which boasts a share price of about $2,334; Tesla Inc. /zigman2/quotes/203558040/composite TSLA +3.79% , which is $777 a share; and Google parent Alphabet Inc. /zigman2/quotes/202490156/composite GOOGL -0.35% /zigman2/quotes/202490156/composite GOOGL -0.35% , which is more than $1,364 a share, as of midday Tuesday.

Jason Katz, a UBS managing director and star portfolio manager, said that the majority of his clients wouldn’t benefit from owning pieces of stocks, but fractional ownership does provide an opportunity to groom young investors who are just getting started. Katz said “my team does see fractional share sales as an opportunity to engage our next-generation clients.”

“In other words, the children and grandchildren of our clients could start to get their foot in the water and learn about investing on a small-dollar basis through the advent of fractional shares,” he explained.

Schwab’s planned offering comes months after Fidelity Investments announced real-time fractional trades in stocks and ETFs back in January , and the trendy trading platform Robinhood had previously launched a similar program.

Microinvesting app Stash, which was founded in 2015, also offers fractional-share trading in individual stocks and ETFs, and the robo-advisory firm Betterment allows investors to purchase slices of ETFs.

Currently, Schwab isn’t allowing partial purchases of ETFs, which have ballooned in interest since the 2008-09 financial crisis, but Dennis Nolte, a financial adviser at Seacoast Bank in Oviedo, Fla., told MarketWatch that fractional-share programs could still provide investors with the ability to create a bespoke, diversified mini-portfolio for themselves at low to no cost.

“You could devise your own [ETF],” he said. “It just democratizes investing and I don’t think it is a bad thing,” Nolte said.

“Fractional shares could let [investors] get a taste of creating diversified equity portfolios but without putting up nearly as much money,” UBS’s Katz said.

Dave Nadig, managing director of ETF.com, told MarketWatch in an interview in January that fractional-share plans like Schwab’s could help to spotlight the advantages of ETFs over the mutual funds that are currently the default investment vehicle for most traditional retirement plans.

/zigman2/quotes/201281754/composite
US : U.S.: NYSE
$ 33.34
+0.19 +0.57%
Volume: 7.29M
Aug. 3, 2020 4:00p
P/E Ratio
13.98
Dividend Yield
2.16%
Market Cap
$42.68 billion
Rev. per Employee
$563,538
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/zigman2/quotes/210598364/realtime
US : U.S.: Nasdaq
11,055.08
+149.20 +1.37%
Volume: 692,125
Aug. 3, 2020 5:16p
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,111.89
-52.79 -1.67%
Volume: 5.07M
Aug. 3, 2020 4:00p
P/E Ratio
119.61
Dividend Yield
N/A
Market Cap
$1585.16 billion
Rev. per Employee
$359,671
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/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 1,485.00
+54.24 +3.79%
Volume: 8.81M
Aug. 3, 2020 4:00p
P/E Ratio
772.83
Dividend Yield
N/A
Market Cap
$266.64 billion
Rev. per Employee
$439,627
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/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,482.76
-5.19 -0.35%
Volume: 2.28M
Aug. 3, 2020 4:00p
P/E Ratio
33.07
Dividend Yield
N/A
Market Cap
$1014.03 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,482.76
-5.19 -0.35%
Volume: 2.28M
Aug. 3, 2020 4:00p
P/E Ratio
33.07
Dividend Yield
N/A
Market Cap
$1014.03 billion
Rev. per Employee
$1.39M
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