Vanguard Tiptoes Into Fractional ETF Trading

Vanguard Tiptoes Into Fractional ETF Trading

December 22, 2021

Vanguard Tiptoes Into Fractional ETF Trading

Vanguard built its brand on making investing more affordable and accessible. Earlier this month, they continued that tradition by giving investors access to fractional shares of ETFs.

According to Ignites, Vanguard chose to skip the fanfare and instead emailed select clients who were eligible for the new fractional ETF option. A spokesman told the publication that the firm plans to expand the program to more users next year.

If you’ve ever invested in a mutual fund using a set dollar amount, you already know how fractional shares work. Rather than selecting how many shares you want, you enter the order based on how much you want to spend.

For example, if you are unable or disinclined to purchase an entire share of, say, Amazon at over $3,000 a pop, you can allocate whatever dollar amount you choose to a portion of the stock. In recent years, upstart apps like Robinhood were first in line to offer fractional shares of stocks. Now, the old guard has followed suit.

Schwab was an industry leader among the mega-firms when it began offering fractional share trading of stocks in October 2019. Fidelity joined the party in January 2020, with fractional trading of ETFs and stocks. For its part, Vanguard rolled out fractional stock trading in February 2021.

What took Vanguard so long? The firm’s intermittent tech challenges may have been a factor. And fractional share trading also goes against Vanguard’s preference for long-term investing over trading. Still, the decision aligns with the company’s mass-market mandate and could support its effort to attract younger clients.

The move could also signal that Vanguard is getting ready to make direct indexing available to a wide range of investors following its acquisition of JustInvest this summer.

We’re generally on board for anything that makes investing more accessible, but we’ll reserve judgment until we see how smoothly the firm is able to roll this option out to the masses.

Is the 4% Retirement Spending Rule Obsolete?

This week’s reader question is about retirement spending: 

Is the classic 4% rule still valid and how should I factor inflation into my retirement spending budget?

Manager of Financial Planning Andrew Busa had this to say:

Maybe, and yes.

This ubiquitous retirement spending maxim, the “4% rule,” came into vogue in the 1990s. The financial planner who created it, William Bengen, examined historical returns from the stock and bond markets and applied them to a diversified portfolio to determine the percentage a retiree could prudently withdraw from their retirement accounts over time. In all of the market scenarios he studied, including the ugliest, withdrawing 4% annually from his hypothetical portfolio meant never running out of money over any 30-year time horizon.

More recently, the solidity of the 4% rule has been challenged, with pundits asking whether rising inflation combined with lower bond yields means a 4% withdrawal can still work for retirees today.

On the surface, the 4% rule is appealing in its simplicity—in combination with a good long-term investment plan, it could see you through retirement. But even Bengen admits that his rule is too general to be considered gospel. We agree. This rule of thumb—like many others—was never intended to be an absolute for every person’s financial plan.

Retirees have quite a few spending regimens and solutions to consider: Monte Carlo simulations use a predictive model to project the likelihood of achieving retirement goals at various withdrawal rates. The bucket method divides assets into three categories (cash, bonds and stocks) and aligns your withdrawal rate with your retirement horizon and risk appetite. And so on.

Like all helpful guidelines in the financial planning playbook, retirement spending needs to be tailored and adjusted to each individual’s situation. The key is to stay invested in an appropriate mix of assets throughout one’s retirement.

The desire to switch to what is possibly a too-conservative portfolio is understandable since retirees are often more interested in a return of their money than a return on their money. However, the retirement timeline is lengthy. You may be retired for as long as you were employed! As a result, you need that money to be working for you, compounding and earning a solid rate of return over time to ensure you don’t run out of gas.

As far as inflation’s impact, we know it can be a challenge when it rises quickly, especially if it throws a fixed budget out of whack. With that in mind, now is a great time to review your plan to make sure you’re comfortable with what you can safely spend in retirement.

Chart of the Week: Are Jobs Back?

We monitor a wide range of data to form our outlook on the market and the broader economy—here’s one indicator our analysts have found enlightening or curious.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso

On the surface, the job market appears healthy, as the unemployment rate fell from 6.7% to 4.2% in 2021. However, a deeper dive reveals that millions of people have yet to return to the workforce. The employment-to-population ratio (a broad measure of the state of the job market) is still well below where it was before the pandemic; it’s currently around the level seen following the depths of the Great Financial Crisis in 2009 and 2010.

Chart of the Week
Note: Chart shows seasonally adjusted monthly employment-to-population ratio from Jan. 1990 through Nov. 2021. Source: Federal Reserve Bank of St. Louis.

Podcast: Crucial Year-End Portfolio Moves for Tax-Saving

It’s been a hectic year—and a positive one for the U.S. stock market. Taking the time to fine-tune your portfolio now may help prevent headaches (and tax bills) come April.

In this episode of The Adviser You Can Talk To Podcast, Portfolio Managers Charlie Toole and Steve Johnson are joined by Data Visualization Analyst Devin Murray to talk techniques for tuning up your portfolio, including how a look under the hood of your holdings may uncover unexpected tax savings. They discuss:

  • When and how to rebalance your portfolio
  • Tax-loss harvesting at the lot level
  • Avoiding common mistakes when it comes to fund distributions
  • How ETFs can help avoid wash sale troubles

Before you get wrapped up in holiday merrymaking, make sure to take one last lingering look at your bottom line. A few tweaks to your portfolio before year-end may make a world of difference come April 15. Click here to listen now!

Adviser Investments’ Today’s Market Takeaways

In Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.

Most recently, Research Analyst Liz Laprade discussed what the recent stock sell-off portends for portfolios, while Steve Johnson observed that we’re seeing a shift in market trends and gave his take on what’s behind it.

We hope you find these episodes engaging and accessible. If there are any topics you’d like us to address, please send an email to info@adviserinvestments.com!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


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