Charles Schwab Could Disrupt The ETF Industry

Investment Pancake profile picture
Investment Pancake


  • Charles Schwab contemplates the possibility of offering fractional shares.
  • Fidelity offers investors a way to buy an entire portfolio with a single click of a button.
  • Put those two tools together, and you could potentially disrupt the entire ETF industry.

There is a recent MarketWatch article about Charles Schwab (NYSE:SCHW), which publicly contemplated offering fractional shares of stocks and ETFs. The idea, as I understand it, would allow younger investors to purchase $100 worth of an ETF such as the SPDR S&P 500 ETF (SPY) that currently trades at close to $300 per share. Sounds simple enough, but wait! There's more.

A Seeking Alpha reader going under the handle CHJ73 recently sent me an email pointing out a feature at Fidelity Investments that I hadn't previously heard of, "Basket Trading." The way that "basket trading" works is you list up to 50 shares of stock that you want to buy with a single click of a button. And then you click the button. Simple. Convenient. And it's been around for a while (back when Fidelity charged for trades, basket trading seems to have been a rather generous cash cow for brokers like Fidelity). Nothing new there.

But stop and think about this for a moment. Basket trading seems quite similar to buying a 50 stock ETF, doesn't it? Only, there are a few salient differences. The big difference is that with basket trades, you cut out the middleman by owning the underlying shares of stock directly, rather than through an ETF. Why might an investor want to do this? For starters, you avoid ETF management fees if you don't own ETFs. Trading is now free at places like Fidelity, so it costs nothing to execute the strategy. And baskets are entirely transparent and customizable - unlike an ETF, which may own shares of companies you'd rather not own and subject to investment selection criteria you might not completely understand or even know about since many of the indexes that some ETFs track are proprietary and secretive.

I'm a big fan

This article was written by

Investment Pancake profile picture
Individual value investor with strong penchant for dividend growth.  A former tax and estates attorney who retired in his early 40s and expatriated to Lisbon, Portugal with his family. Now writes about tax law, portfolio strategy and life in sunny Portugal and tutors students in personal financial planning.Association with SA author Evelyn TriasContributor, CNBC

Disclosure: I am/we are long BLK, SCHW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not investment advice, and I am not an investment advisor.

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