Can You Buy Fractional Shares of ETFs? How to Invest in Small Amounts of ETFs?

It is indeed possible to purchase fractional shares of ETFs. Trading fractional ETF shares is one way to invest in ETFs with small amounts of capital.

At the beginning, we mentioned that buying "one lot" of an ETF means purchasing 1000 units. Consequently, buying fractional ETF shares involves acquiring less than 1000 units (1-999) of an ETF. For instance, trading 50 ETF units would be considered fractional share trading. Investors should be aware that trading fractional ETF shares differs slightly from trading full ETF shares in terms of fee calculations, trading time periods, and order placement methods. We will delve into these details below.

Fractional ETF Share Trading Periods and Rules

Similar to regular stock trading, fractional ETF share trading is divided into two time periods: during market hours and after-hours. It's important to note that during market hours, investors can only place orders electronically, while after-hours trading allows for various order placement methods, including phone or over-the-counter channels.

How Are Fees Calculated for Fractional ETF Share Trading?

The fee calculation method for normal stock trading is as follows: Fee = Share Price x Number of Shares x 0.1425%

If the broker offers a fee discount, the calculation becomes: Fee = Share Price x Number of Shares x 0.1425% x Fee Discount

Some brokers may set a minimum fee of $20 if the calculated fee falls below this amount. Of course, many brokers offer fee discounts to users in the competitive market environment.

How to Place Orders for Fractional ETF Shares?

Investors can choose to open an account with a broker and complete fractional share orders through their app. The process for placing fractional share orders is similar to that of full shares. Investors need to select either "Intraday Fractional Shares" or "After-Hours Fractional Shares" as the trading type, with the order type limited to "Limit Order". Then, choose between "Buy" or "Sell", and finally input the "Units" (1-999) and "Price".

Important Considerations for ETF Fractional Share Trading

While we've covered trading times and order restrictions for ETF fractional shares, it's crucial to understand that the matching and pairing of fractional ETF shares occur independently from full share trading in separate stock pools. As a result, the transaction prices for fractional ETF shares may differ from those of full shares, and the spread is often larger. This is particularly important for investors who frequently engage in small-amount ETF transactions.

Moreover, for most ETFs, the trading volume of fractional shares during market hours is typically less than that of full shares, and after-hours trading often sees even fewer quotes. In quiet market conditions, it may take longer to complete transactions or even be impossible to match trades.

Method 2: Trading Small Amounts of ETFs via CFDs

If you're looking for a more liquid method to trade small amounts of ETFs, CFDs (Contract for Difference) are a commonly used investment approach.

In addition to directly buying fractional ETF shares through a securities account, investors can indirectly invest in ETFs through CFD broker platforms. Compared to fractional ETF share trading, CFDs offer leverage, further reducing the principal required for trading and improving capital efficiency. They also support both long and short positions, allowing profits not just when prices rise. Furthermore, CFDs can effectively avoid the long waiting times sometimes associated with fractional share trading.

FAQ: Do Fractional ETF Shares Receive Dividends?

The answer is affirmative. Whether an investor owns 1000 ETF shares or just 1 fractional ETF share, they will receive dividends normally. The more shares owned, the higher the dividend received.