Online investment manager Nutmeg has become the first provider to launch fractional shares in exchange traded funds. The move will allow Nutmeg to buy and sell as little as one pence in any ETF as opposed to whole shares, which can be costly.
Shaun Port, CIO at Nutmeg, talks about fractional shares in ETFs
By offering fractional shares it means that client money can be invested more precisely. The firm will also continue to trade ETFs together – as whole shares in the market – so clients can still benefit from the competitive pricing currently used when trading.
Shaun Port, chief investment officer at Nutmeg, said: “With fractional shares we can now allocate with even greater precision. This gives us an incredibly powerful tool to buy into a wide range of ETFs and to fully invest even small contributions, and re-invest dividends.”
All shares will be held as full shares in its client account at State Street in accordance with CASS rules. In its book of records, each customer portfolio will be held at the relevant whole share and fractional amount. In order to maintain a whole share balance the firm operates a small client fractional account, which ensures that the balances add up to full shares. All customer holdings including their fractional amounts are traded in the market at the best available price. The client fractional account is adjusted up or down every time they trade.
The firm recently halved its £1,000 minimum investment criteria, meaning that it can now manage segregated client portfolios from £500.
Port told ETF Strategy: “This [fractional shares] removes the barrier that high share prices have previously presented to managing smaller investment portfolios. Previously a £100 ETF share would need to be a 10% holding in a £1000 portfolio. We can now purchase a fraction of the share for clients whose allocation is smaller than the share value – i.e. we could purchase 1/100th of the share in the above example for £1, which is game-changing when reinvesting dividends and managing smaller portfolios. This is the main reason behind our reduction in the minimum portfolio value from £1,000 to £500.
It also enhanced its electronic trading systems in February 2013 by cutting out intermediaries. It meant it is now able to trade more efficiently in bulk trades, obtaining better prices and matching client orders across its platforms.
Port said: “We only ever trade a whole share in the market itself. However, within our proprietary portfolio management systems we’re now able to allocate up to 1/10,000th of a share to a client account, meaning we can be extremely accurate and efficient in managing portfolios across thousands of clients.”