Investing in exchange-traded funds (ETFs) has become a cornerstone of modern investing, offering diversification, liquidity, and low costs. For many new investors, however, buying full shares of ETFs can be intimidating—especially if the share price of popular ETFs exceeds hundreds of dollars.
This is where fractional ETFs come into play, allowing investors to buy portions of a share rather than a full share. In this guide, we’ll explain how to buy fractional ETFs at Schwab, step by step, and discuss the benefits, limitations, and strategies for maximizing your investment.
What Are Fractional ETFs?
Fractional ETFs allow you to invest in a portion of a single share, rather than buying an entire share. For example, if an ETF trades at $500 per share, you could invest $50 and own 0.1 share of that ETF. Fractional shares make investing more accessible to beginners and allow for dollar-based investing, meaning you can invest exactly the amount you want rather than being constrained by share prices.
Key Benefits of Fractional ETFs:
Lower investment barriers: Invest any amount, even with limited funds.
Dollar-cost averaging: Buy consistent amounts over time, smoothing out market fluctuations.
Portfolio diversification: Build a diversified portfolio without needing thousands of dollars upfront.
Flexibility: Buy ETFs that may have high per-share prices without waiting to accumulate enough cash for a full share.
Schwab’s Fractional ETF Program
Charles Schwab, a leading online brokerage, offers fractional investing through its Stock Slices and ETF investing programs. Fractional investing allows clients to buy slices of ETFs (and stocks) starting at $5 per investment.
Features of Schwab’s Fractional ETF Program:
Minimum Investment: $5 per ETF.
Commission-Free Trading: Schwab does not charge commissions for buying fractional ETFs.
Automatic Reinvestment: Dividends can be reinvested into fractional shares, increasing compounding potential.
Wide ETF Selection: Schwab allows fractional investing in Schwab ETFs, popular index ETFs, and ETFs from other providers.
Step-by-Step Guide: How to Buy Fractional ETFs at Schwab
Here’s how to get started with fractional ETF investing at Schwab:
1. Open a Schwab Brokerage Account
To invest in fractional ETFs, you need an active Schwab brokerage account.
Steps:
Visit the Schwab website or mobile app.
Click “Open an Account” and choose a brokerage account type (Individual, Joint, IRA).
Complete personal information: Social Security number, employment, and financial info.
Fund your account via bank transfer, wire, or check.
2. Enable Fractional Share Investing
Schwab automatically supports fractional investing in most ETFs and stocks through its Stock Slices feature, but verify your account settings:
Log in to Schwab.com.
Navigate to Settings → Trading Preferences → Fractional Shares.
Ensure fractional investing is enabled.
3. Research ETFs to Buy
Before purchasing, research ETFs based on your investment goals, risk tolerance, and diversification needs. Consider:
Index ETFs: Track benchmarks like the S&P 500 (SPY), Nasdaq 100 (QQQ), or Schwab U.S. Broad Market ETF (SCHB).
Bond ETFs: Provide fixed-income exposure, such as Schwab U.S. Aggregate Bond ETF (SCHZ).
Sector ETFs: Focus on specific industries like technology, healthcare, or energy.
International ETFs: Diversify globally with ETFs tracking foreign markets.
Tips for ETF Selection:
Look at expense ratios: Lower costs mean higher net returns.
Check historical performance, but remember past returns do not guarantee future results.
Evaluate diversification: Ensure your portfolio covers multiple asset classes.
Read ETF prospectuses for fund objectives, holdings, and fees.
4. Place a Fractional ETF Order
Once you’ve selected your ETF, here’s how to buy a fractional share:
Via Schwab Website:
Log in to Schwab.com.
Navigate to Trade → Trade Stocks/ETFs.
Enter the ETF ticker symbol (e.g., SCHB).
Choose Buy.
Under “Quantity,” select Dollar Amount instead of number of shares.
Enter the dollar amount you wish to invest (minimum $5).
Confirm market or limit order type:
Market Order: Executes at the next available market price.
Limit Order: Executes only at a specified price or better.
Review your order and click Submit.
Via Schwab Mobile App:
Open the Schwab app and log in.
Tap Trade → Stocks/ETFs.
Enter ETF symbol.
Tap Buy, then select Dollar-Based Order.
Enter investment amount.
Review and submit order.
Schwab executes fractional ETF orders at market close for most ETFs. Keep in mind price may fluctuate slightly between order placement and execution.
5. Set Up Automatic Investments (Optional)
To maximize compounding, Schwab allows automatic recurring investments in fractional ETFs:
Go to Accounts → Automatic Investments.
Select the ETF and amount to invest.
Choose frequency: weekly, biweekly, or monthly.
Confirm automatic funding from your linked bank account.
This is a great way to practice dollar-cost averaging and invest consistently without manual intervention.
Advantages of Buying Fractional ETFs at Schwab
Accessibility: Start investing with as little as $5.
Diversification: Build a multi-ETF portfolio even with limited funds.
Flexibility: Buy portions of expensive ETFs without waiting to accumulate full shares.
Cost-Effective: Schwab’s commission-free trading eliminates fees for small investments.
Automated Growth: Reinvest dividends and set up recurring investments.
Limitations and Considerations
While fractional ETF investing has many advantages, there are some limitations to consider:
Order Execution: Fractional shares may not execute in real time; some ETFs process fractional orders at the end of the trading day.
No Voting Rights: Fractional share investors typically do not have direct voting rights in fund decisions.
ETF Availability: Not all ETFs may be eligible for fractional investing at Schwab. Always check your account before planning purchases.
Transfer Restrictions: Fractional shares may not be transferable to other brokerages.
Strategies for Investing in Fractional ETFs
1. Dollar-Cost Averaging
Investing a fixed amount at regular intervals reduces market timing risk and allows you to buy more shares when prices are low and fewer shares when prices are high. Fractional ETFs are ideal for this strategy.
2. Portfolio Diversification
Use fractional shares to allocate smaller amounts across multiple ETFs, such as:
40% U.S. stock ETFs
30% international stock ETFs
20% bond ETFs
10% sector or specialty ETFs
This allows a well-rounded portfolio without requiring thousands of dollars.
3. Targeted Investment Goals
Retirement: Buy low-cost index ETFs and bond ETFs.
Growth: Focus on tech and growth-oriented sector ETFs.
Income: Bond and dividend-focused ETFs can provide cash flow while allowing fractional investments.
Monitoring and Managing Your Fractional ETF Portfolio
Check Performance Regularly: Use Schwab’s portfolio tools to track gains, losses, and allocation.
Rebalance Portfolio: Adjust allocations periodically to maintain your target investment mix.
Reinvest Dividends: Fractional shares make it easy to reinvest dividends fully.
Tax Considerations: Be aware of capital gains taxes if selling fractional shares.
Conclusion
Buying fractional ETFs at Schwab is an excellent way for investors to enter the market with minimal funds, diversify portfolios, and practice disciplined investing. With a minimum investment of $5 per ETF, commission-free trading, and the ability to set up recurring investments, Schwab’s fractional ETF program makes investing accessible to both beginners and experienced investors alike.
By carefully selecting ETFs, employing strategies like dollar-cost averaging and diversification, and taking advantage of Schwab’s tools, you can build a robust portfolio even with limited capital. Over time, fractional ETF investing at Schwab can help investors grow their wealth efficiently, paving the way toward achieving long-term financial goals.