Want to invest in ETFs but have limited funds? How fractional trading can help you get started easily

Explosive Growth of the ETF Market Background

The global ETF market has experienced remarkable expansion over the past 20 years. Since the first ETF was launched in 1990, this market has grown into a massive investment sector. Data shows that by the end of 2003, the global ETF assets under management reached $212 billion, surpassing $1 trillion in 2021, and by the end of 2023, it had climbed to $11.61 trillion, with an average annual compound growth rate of 22.16% over nearly 20 years.

In the Taiwan market, the development of ETFs is equally impressive. In 2003, Taiwan launched its first ETF—the Yuanta Taiwan 50 ETF. Twenty years later, in December 2023, the total number of ETF listings in Taiwan reached 227, with assets totaling NT$3.56 trillion, more than doubling from NT$1.74 trillion in 2020. This indicates that more and more investors are recognizing the value of ETFs as an investment tool.

The “One Lot” Trading Limit and the Dilemma of Small-Amount Investments in Taiwan Stocks

However, Taiwan’s stock market has a unique trading setting—the basic trading unit is a “lot,” which is 1,000 shares. This setup often becomes a barrier for retail investors with limited funds to enter certain popular ETF markets.

For example, the recent closing price of Yuanta Taiwan 50 ETF is NT$161.65. Buying one lot requires:

161.65 × 1000 = NT$161,650

For many individual investors, this amount is not small. So, when your account funds are insufficient to buy a full lot of an ETF, what should you do? The answer is: You can purchase ETF fractional shares.

What Are ETF Fractional Shares? How Do They Differ from Whole Shares?

ETF fractional shares refer to buying less than 1,000 units (1~999 shares) of an ETF. For example, purchasing 50 or 100 shares of an ETF falls into the fractional share category.

There are several differences between fractional shares and whole shares:

• Trading Units: Fractional shares are 1~999 shares; whole shares are 1,000 shares or multiples thereof.
• Commission Calculation: Fractional shares often have minimum transaction amounts; whole shares are calculated proportionally.
• Trading Hours: Fractional and whole shares have their respective trading periods.
• Matching Mechanism: The matching of fractional and whole shares occurs in different trading pools.

Details of Trading Hours and Rules for Fractional Shares

As an investor interested in trading fractional shares, you need to understand the trading time restrictions and rules:

Intraday Trading Hours: 9:00 to 13:30, limited to electronic orders (online or voice). The first matching occurs at 09:10, followed by continuous matching every minute via auction. Orders are matched based on price priority and time priority.

After-Hours Trading: 13:40 to 14:30, with no restrictions on order methods—orders can be placed via phone, counter, etc. At 14:30, a final auction occurs, and orders at the same price are randomly matched.

Note that intraday fractional share trading volume is usually lower than whole shares, and after-hours quotes are scarcer. During quiet market conditions, it may take longer to complete transactions.

How Are Transaction Fees for Fractional Shares Calculated? Beware of the Minimum Consumption Pitfall

For many new investors, fee calculation is an often overlooked aspect. The standard fee formula is:

Fee = Share Price × Number of Shares × 0.1425% × Discount Rate

Many brokers set a minimum transaction amount, commonly NT$20, but with increasing market competition, more brokers have lowered it to NT$1.

For example, if you buy 200 shares of Yuanta Taiwan 50 ETF at NT$161.65, with a 35% discount on the fee:

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

However, if you buy only 1 share, the calculation yields NT$0.23, which is below the NT$1 minimum, so you will be charged NT$1. This means that only when purchasing at least 5 shares does the fee calculation follow the formula:

5 × 161.65 × 0.1425% = NT$1.15

Therefore, the transaction fee for 1 lot of 1,000 shares and for 1 share are effectively the same, provided each order exceeds the minimum consumption standard.

Besides Fees, Transaction Tax Also Applies

When selling fractional shares, besides paying broker fees, you must also pay a transaction tax to the government. The applicable tax rate for ETFs is 0.1%. So, selling 200 shares of Yuanta Taiwan 50 ETF would incur:

200 × 161.65 × (0.1425% + 0.1%) = NT$78.4

Transaction fees and taxes are the actual costs of small investments. Savvy investors should factor these into their cost considerations.

How to Place Orders for Fractional Shares? Practical Steps

Order process for Taiwan stocks: Log into your broker’s app, select “Intraday Fractional” or “After-hours Fractional” trading, choose “Limit Order,” then select “Buy” or “Sell,” input the number of shares (1~999), and set your target price.

For US stocks, the process is even simpler. For example, with Firstrade, there is no “lot” concept; investors can freely choose any number of shares. After selecting “Trade Stock,” enter the number of shares (e.g., 10), choose a market or limit order, and set the order validity up to 90 trading days. Many US brokers have fully waived trading fees, making small investments more friendly.

Practical Tips for Placing Fractional Share Orders

When trading fractional shares, mastering some order strategies can improve the chances of execution:

• Popular stocks with high liquidity: Place buy orders at the limit-up price or sell at the limit-down price, as the highest bid or lowest ask will be matched first.
• Less liquid stocks: Place orders slightly below the closing price to increase the likelihood of execution.
• Other stocks: Placing orders at the closing price is a safer choice.

Dividend Distribution: Can Fractional Shares Receive Dividends?

Many investors are concerned: if I buy fractional shares, can I still receive dividends normally? The answer is yes. Whether holding 1,000 shares or just 1 share, investors can receive dividends as usual. The more shares held, the higher the dividend income. This is why many “dividend stock” investors choose to invest regularly in high-dividend ETFs—even if each purchase is fractional, the long-term accumulation of dividends can be substantial.

CFD Trading: A More Liquid Alternative

Besides directly buying ETF fractional shares, another small-investment method worth noting is Contract for Difference (CFD) trading.

Compared to fractional shares, CFDs offer the following advantages:

1. Leverage Trading: Most CFD platforms support leverage, reducing the required capital. For example, on Mitrade, purchasing the iShares Semiconductor ETF (price $223.91 USD) with 10x leverage requires only $22.39 USD to open a position.

2. Two-Way Trading: Supports both long and short positions, not limited to profit only when prices rise.

3. Trading Hours: CFD trading is usually 24/7, not restricted by stock market hours.

4. Avoid Waiting: Unlike fractional shares, which may involve long waits or failed matches, CFDs offer better liquidity.

5. Cost Structure: Most CFD platforms charge no commission but profit from the spread. Investors should understand the spread costs.

Risks to Consider When Trading Fractional Shares

While enjoying the convenience of small investments, it’s important to recognize the limitations of fractional trading. The transaction prices for fractional and whole shares may differ, with fractional quotes often having larger spreads. Additionally, after-hours fractional trades are less frequent, and during quiet markets, it may be difficult to execute at desired prices or even to match orders. Investors can check daily after-hours fractional trading summaries on the Taiwan Stock Exchange website to gauge market liquidity.

Summary: Choose the Investment Method That Suits You

Whether directly purchasing ETF fractional shares or using CFDs for small investments, the core goal is to enable investors with limited funds to participate in the ETF market. Understanding the pros and cons of each, combined with personal financial situations and investment goals, will help you make the best choice.

The advantages of small-amount ETF fractional investing include flexibility and low barriers, while CFDs offer more trading tools and 24-hour opportunities. The key is to rationally evaluate costs, risks, and returns, and to develop a long-term investment plan rather than chasing short-term gains.