Retail investors' small-scale investment dilemma: Why choose ETF fractional shares?

Since the launch of the world’s first ETF in 1990, these investment tools have demonstrated strong vitality. Data shows that at the end of 2003, the global ETF assets under management were only $212 billion, but by the end of 2023, this figure had surged to $11.61 trillion, with an impressive compound annual growth rate (CAGR) of 22.16% over nearly twenty years.

In the Taiwan market, ETF development has also been rapid. Starting from the birth of the first ETF—Yuanta Taiwan 50 ETF—in 2003, by the end of 2023, Taiwan had listed 227 ETFs with a total asset size of NT$3.56 trillion, more than doubling from NT$1.74 trillion in 2020.

However, many retail investors interested in entering the ETF market face a practical dilemma: The minimum trading unit for Taiwan stocks is “one lot” (1,000 shares), which means investing in a popular ETF may require a large initial capital. For example, Yuanta Taiwan 50 ETF, with a closing price of NT$161.65, would require over NT$161,000 to buy one lot—an amount that is not small for small-scale investors.

Against this background, many investors are beginning to explore a question: Can I buy ETF fractional shares like stocks? The answer is yes, and this has become the preferred method for many retail investors to make small-scale ETF investments.

How ETF Fractional Share Trading Works

Fractional shares refer to ETF purchase amounts less than 1,000 shares (between 1 and 999 shares). Unlike buying a full lot, fractional share trading involves different rules for transaction fees, trading hours, and order placement. Investors must understand these details thoroughly to effectively reduce trading costs.

On the Taiwan Stock Exchange, fractional share trading is divided into two periods:

Intraday fractional share trading (9:00 AM to 1:30 PM) is limited to electronic orders, executed through a call auction. Investors can place their first order at 9:10, with subsequent matches every minute, following the “price priority, time priority” principle.

After-hours fractional share trading (1:40 PM to 2:30 PM) allows orders via online, phone, or counter. All orders are matched in a single call auction at 2:30 PM, with the order of execution at the same price determined randomly.

Note that all fractional share orders are limit orders valid for the day (ROD).

How are fractional share transaction fees calculated?

Many first-time investors are confused about how to calculate fees for fractional shares. Let’s clarify with an example:

The standard stock transaction fee formula is: Stock Price × Quantity × 0.1425% × Broker Discount

Suppose you buy 200 shares of Yuanta Taiwan 50 ETF at NT$161.65, with a broker offering a 6.5% discount:

• 161.65 × 200 × 0.1425% × 0.65 = NT$29.95

An important threshold exists: most brokers have a minimum fee, historically NT$20, but in recent years many have lowered it to NT$1. This means that when purchasing small fractional shares, the fee may be capped at the minimum.

For example, buying 1 share of Yuanta Taiwan 50 ETF:

• Fee calculation: 161.65 × 1 × 0.1425% = NT$0.23 Since NT$0.23 is below the NT$1 minimum, the fee will be NT$1.

Therefore, investors need to buy at least 5 shares (0.23 × 5 = NT$1.15 > NT$1) to avoid paying the minimum fee of NT$1.

When selling fractional shares, a transaction tax of 0.1% is also payable. For example, selling 200 shares at NT$161.65 would incur:

• 200 × 161.65 × 0.1425% + 0.1% = approximately NT$78.4

As long as each order involves enough shares, the total fee won’t be much higher than buying a full lot.

Effective fractional share order strategies

Before trading fractional shares, investors should understand a key characteristic: The trading pools for fractional and full lots are separate, leading to wider bid-ask spreads for fractional shares. This is especially noticeable in a quiet market—intraday fractional trading volume is low, and after-hours even more so, sometimes making quick execution difficult.

To improve the chances of execution, investors can adopt different order strategies based on the liquidity of the stock:

• Popular ETFs with high liquidity: Place buy orders at the limit-up price or sell at the limit-down price, as after-hours matching follows the “highest price wins” principle.
• Less traded or unpopular stocks: Place orders slightly below the closing price to increase matching chances.
• General stocks: Placing orders at the closing price is most stable.

Investors can check the daily after-hours fractional share trading summary on the Taiwan Stock Exchange website to assess the actual liquidity of the ETF.

Advantages of US stock fractional share investing

In contrast, the US stock market does not have the concept of “one lot.” Investors can directly purchase any number of shares of ETFs without waiting for special fractional trading periods.

For example, on a US platform, buying SPY (tracking the S&P 500) allows investors to input any number of shares (e.g., 10 shares). Orders can be placed as market or limit orders, with validity periods up to 90 trading days.

Moreover, many US brokers have completely waived ETF trading fees, with some charging as low as a minimum of $1. This cost advantage is significant for those who want to trade small amounts frequently.

CFD: Another small-investment channel

Besides direct fractional share purchases, investors can also use Contracts for Difference (CFD) platforms for small ETF investments. CFDs often offer leverage, allowing investors to participate in the market with less capital.

For example, on Mitrade, buying iShares Semiconductor ETF at $223.91 with 10x leverage means the actual capital needed is only $22.39—reducing costs by 90%.

Advantages of CFDs include:

• Support for both long and short positions
• 24-hour trading availability
• Most have no commission, only spread costs

However, CFD trading involves leverage risk, so investors should operate cautiously.

Can you still receive dividends when buying fractional ETF shares?

Many regular investors are concerned: Can I still receive dividends if I buy fractional ETF shares?

The answer is yes. Whether holding 1,000 shares of a full ETF or just 1 fractional share, investors can receive dividends normally. The more shares held, the higher the dividend income.

This explains why dollar-cost averaging has become increasingly popular in recent years. According to Taiwan Stock Exchange statistics, high-dividend ETFs are among the most favored by “dividend stock” investors, and fractional share trading provides a flexible entry point for these investors.

Fractional share trading vs CFD trading: how to choose?

Both small-scale ETF investment methods have their advantages:

Fractional share trading is suitable for investors seeking stable, full ownership of ETFs, with fixed and transparent fees, and supports regular investment plans. Its drawbacks include limited trading hours and sometimes insufficient liquidity.

CFD trading is suitable for those seeking flexibility and leverage, supporting 24-hour trading and two-way operations, often with no commission. However, it carries leverage risks.

Retail investors should choose based on their needs, risk tolerance, and trading frequency. For steady, periodic investments, fractional share trading is ideal; for active, short-term trading, CFDs may be more attractive.

First steps to start small-scale ETF investing

Whether choosing fractional shares or CFDs, investing only involves three simple steps: first, register on a broker platform and fill in necessary information; second, deposit funds via bank transfer or other methods; third, explore trading opportunities and place orders.

For retail investors with limited capital but eager to enter the ETF market, fractional share trading and CFDs significantly lower the participation threshold. The key is understanding each method’s operation and cost structure to make the most suitable investment decision.