When the Robinhood crowd buys for the long haul

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Fractional shares are an easy way for small investors to buy a piece of Tesla or Apple, but many are using it as a way to slowly accumulate exchange-traded funds that give them a small piece of the broader market.

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Cari Swanger, a 33-year-old pharmacist living in Seattle, opened her first SoFi Invest account this summer after she finished paying off her student loans. Ms. Swanger chose fractional investing and ETFs because they allowed her to diversify and minimize her risk.

"One share of Amazon or Tesla is a lot of money these days," she said. "I made myself a promise: I'm not going to put all my money on one stock."

Ms. Swanger's first investment was $50 in the SoFi Select 500 ETF, which tracks the S&P 500. She has since invested in the SoFi Weekly Income ETF, which invests in corporate bonds, and in the SoFi 50 ETF, an ETF of the 50 most popular U.S. stocks on SoFi.

Ticker Security Last Change Change %
SP500 S&P 500 3663.46 -4.64 -0.13%
TSLA TESLA INC. 609.99 -17.08 -2.72%
AAPL APPLE INC. 122.41 -0.83 -0.67%
AMZN AMAZON.COM INC. 3,116.42 +14.93 +0.48%

Fractional shares are an easy way for small investors to buy a piece of Tesla or Apple, but many are using it as a way to slowly accumulate exchange-traded funds that give them a small piece of the broader market. (Robinhood/istock)

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Investing in fractions of ETF shares works just like buying other fractional shares: Investors choose a dollar amount they would like to invest in the ETF, which a brokerage already has purchased, and then the fraction they hold is whatever portion of the share their dollar contribution is worth.

Ryan Lee, a 20-year-old business student at the University of New Hampshire, uses the investment app Stash to buy fractional shares of high-profile ETFs.

"I can diversify so easily with just $5 at a time," he said. "By using ETFs, I had diversification."

Mr. Lee said he bought QQQ and the iShares Russell 2000 ETF at the beginning of his investment journey in 2018. They appealed to him because they increased his exposure to new parts of the market — QQQ to tech, the iShares Russell 2000 to track small-cap stocks — and also diversified his investment portfolio.

Robinhood, which reported more than 3 million new accounts this year, started offering a feature in May that allows users to regularly schedule investments and buy fractional shares. (Robinhood)

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"When I was putting $100 into that tech ETF, I invested in more than just Apple," he said.

Not all platforms offer the ability to buy ETFs through fractional trading. Charles Schwab Corp., for example, currently offers only S&P 500 stocks through its fractional platform, Stock Slices.

At Fidelity, 18% of the trades on the fractional and dollar-based investing platform have been in ETFs since it launched this February.

With this year's retail frenzy in the backdrop, the rise of fractional investors buying ETFs may ease the fear that these new investors will get wiped out when this market rally ends.

"If we're worried about people speculating and getting themselves into trouble, it's better they have well-diversified portfolios," said Larry Harris, former Securities and Exchange Commission chief economist and professor of finance at the University of Southern California's Marshall School of Business. "The more we encourage people to hold well-diversified portfolios, the less likely they are to be wiped out, and the less likely they are to shy away from the markets in the future when it would be unwise to do so."

Ms. Swanger said she will continue to invest in ETFs. Over the course of the year, she has gradually increased her stake and now estimates she has close to $40,000 in fractional ETFs.

In some cases, she is able to buy whole shares of ETFs, but she said that overall, the fractional approach makes it easier for her to map out her investments.

"I didn't want to put my earnings directly into [stock] shares," she said.

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