I am excited to announce that Vanguard is FINALLY rolling out fractional Exchange-Traded Funds (ETFs). What does that mean for you or other investors who want to purchase ETFs but want to keep investments to a specific dollar amount? Fractional shares allow a person to buy a portion of an ETF for any dollar amount, even as low as one dollar, rather than requiring the investor to purchase the entire share. So for all my Vanguard investors who focus on dollar cost averaging, fractional ETFs are now available to you. The only issue at this point in time is that while investors can buy fractional shares, investors cannot automate this process…yet! I did speak with a Vanguard employee, who said it should be “coming soon.” As soon as the automation component becomes available, I will be utilizing it and making some changes to my personal portfolio. I will shift all my current index funds into their equivalent ETFs.
This also enables investors to diversify their portfolios since they can invest in companies that might be out of reach financially due to the cost of the full ETF share. Other trading companies have offered this for some time, but now, Vanguard is adding this option to the services it provides.
When I first learned about this, I was concerned that this would cause a taxable event within non-retirement accounts. I verified with Vanguard that this would not be the case IF, in fact, the investor swaps his or her current index holding for the equivalent ETF. Since there is no taxable event and my fears have been allayed, as soon as they officially roll out the automation component, I will make this change. The adjustments that I will be making to my personal portfolio do not mean that I am changing my investment strategy in any way. My strategy remains unchanged. However, by utilizing these fractional ETFs, I will be able to slightly reduce the costs that are already minimal in my portfolio. I want to pause here and stress that this change to ETFs will have a small impact overall. I am attempting to maximize all of the benefits I can get.
Here are the main cost changes and things worthy to note in regard to ETFs:
Mutual Funds distribute capital gains to its shareholders, but Exchange-Traded Funds don’t. While Index funds are also mutual funds, they are passive in nature, and therefore, do not usually have a ton of turnover within. Therefore, capital gains distributions do not occur often for index funds. But it can, which is something I would like to eliminate if the choice was mine.
- Expense ratios which indicate the cost of a particular mutual fund or ETF pay for the management, marketing, distribution, etc. of the portfolio. Within Vanguard, their ETFs are a few basis points cheaper than their equivalent index funds. It’s not much, but it’s still something.
- Again, this is not earth shattering for most people but can slightly optimize your portfolio. Fractional ETFs open up opportunities to be more diversified and to purchase a variety of ETFs that may, otherwise, be out of the question due to the cost.
Vanguard has been beta testing fractional ETFs since December 2021, and it is now official. I will provide an update when they allow for automation for dollar cost averaging into ETFs. I did speak with them, and they said it should be “coming soon.” Stay tuned for more information about this as well as other breaking and helpful financial information. Follow me at Budgetdog.