Pension and robo-advice demand sparks fractional EFT dealing services

Anna Fedorova reports

Investment services providers are beginning to offer fractional share dealing on exchange-traded funds (ETFs) to meet investor demand for lower entry levels on the vehicles.

Currently, most platforms only allow ETFs to be traded in whole shares, which can often be £100 per share or more, making it harder for retail investors to utilise these vehicles if they are looking to invest smaller amounts on a regular basis.

Hargreaves Lansdown passive investment manager Adam Laird said he has identified a particular need among pension investors, who now have more investment flexibility following the introduction of pension freedoms last year.

He said: “ETFs have never been used as a vehicle for regular saving, they have always tended to be for a lump sum investment. If you are putting £50 a month away that is often less than one share, so you simply cannot do those trades.

“But ETFs and passives are becoming particularly popular in pensions, and many people save small amounts regularly, so it is a necessary hurdle for the industry to get over.

“Fractional share dealing is a good thing and will allow more flexibility to use ETFs as part of portfolios.”

New initiatives

However, platforms and brokers have begun addressing the problem, with Nutmeg paving the way by offering investors the option to hold as little as one penny in an ETF, instead of whole shares.

Winterflood Business Services (WBS) also announced plans to follow suit in July by offering trading and custody of ETFs on a fractional share basis, which will allow shares to be broken down to four decimal places, essentially going down to pennies.

Alex Kerry, head of WBS, said: “As a country we have lagged behind the US in terms of adoption of ETFs, they have caught fire in the States and stayed lukewarm in Europe in the retail space, and we think there are three reasons for that – cost, access, and the ability to trade fractions.

“ETFs trade at some large price points. Some ETF providers are looking to add lower price points at launch, but the nature of ETFs means the share size will grow as inflows come in.”

More of our DFMs are now selecting ETFs for use in their model portfolios, and aggregated trading can help with the trading costs, particularly when it comes to rebalancing.

The service WBS offers will plug into third-party platforms, giving them the ability to trade in fractions. Kerry has seen particular interest from the robo-advice space, where providers typically offer low minimum requirements for clients to invest.

Platform Novia, which partnered with WBS at the end of last year to offer low-cost ETF trading for its clients, is also looking at this space, although plans have not yet been finalised.

A spokesperson from Novia said: “We have seen a substantial rise in inflows into ETFs on the Novia platform. More of our DFMs are now selecting ETFs for use in their model portfolios, and aggregated trading can help with the trading costs, particularly when it comes to rebalancing.

“With the Retail Distribution Review creating a level playing field for ETFs, we expect the rise in inflows to continue and with the new low cost trading facility we launched last year with Winterflood and the aggregated trading facility offered on the platform we are now starting to see some of the barriers to trading ETFs reducing.”

Additional costs

Laird said Hargreaves is also considering this solution, but added it remains unclear who will bear the extra costs generated – the service provider or the end investor.

Nutmeg, which claims to be the first wealth manager to offer fractional share dealing in the UK, does not charge a separate platform fee on ETF trading, with all fees included in its annual management charge, which ranges from 0.3% to 0.95%. A typical platform charges £12 to trade ETFs or shares, according to Nutmeg.

Meanwhile, WBS said fees depend on the platform it is dealing with and are often wrapped into the custody fee, but its headline dealing rates are 5bps. The overall fee then gets passed on to the end client by the platform using it.

Although the move to fractional dealing is considered by many to be a watershed moment for the European ETF industry, not all providers agree.

Wisdom Tree Europe head of ETF strategy Nizam Hamid does not believe fractional share dealing is a critical issue for investors, saying most deal in larger sums than the price of one ETF share.

“I am not sure it is the biggest stumbling block for the industry to overcome, as many ETFs have relatively low price ranges. It is a nice-to-have, rather than absolutely critical. You do not trade half a share of Vodafone or BP.

“It is more about portfolio management companies being able to manage client accounts in sub-divided ways internally.”