shutterstock_141858643Investing builds wealth. Holding cash doesn’t. While this is a radical simplification, it reflects a core investing principle: Over the long term, the more you have in the market, the more opportunity you have to earn returns.

Or, to put it another way: if you’ve allocated money for investment, then all of that money should always be invested, precisely in the way that you intend. At Betterment, we use fractional shares to make this happen. But in some investment services, that’s not the case. Some of your money may be sitting on the side, uninvested, and not working for you.

Let’s look at why that is, and how our consistent use of fractional shares puts you and your money in a more advantageous position.

Never leave money out of the market

As you may know, trading on an exchange can only happen in whole shares, which is why many investing platforms only allow you to trade whole shares.

But this is not really an efficient way to do things. For example, imagine that you have a portfolio with 12 ETFs, and one share of each ETF costs $100. Now you make a $90 deposit (or your ETFs pay a total of $90 of dividends). With a platform that only uses whole shares, you cannot use any of that cash—read: zero dollars—to add to your investments because it’s not enough to buy a single share of anything. So that 90 bucks will just remain uninvested, waiting for additional cash, before you can buy even a single share.

As deposits and dividends flow through this account over time, it will always have some amount of pesky cash remainder sitting there. This is sub-optimal investing and a wasted opportunity over the years.

Technology means less waste

As efficiency junkies at Betterment, we can’t stand the thought of even a penny sitting on the sidelines not earning returns. Inefficiency is our enemy. That’s why, when we launched our service in 2010, we put a lot of work into supporting fractional shares.

The full investment of every dollar according to your desired asset allocation means that your money is getting absolutely the most value possible out of investing. This is part of our thoughtful application of technology.

It means an investor with a $2,500 account receives the same diversification benefit as one with a $2.5 million account (and we don’t require a minimum balance).

Down to 1/1,000,000th of a share

You can’t go to market and buy or sell fractional shares. However, a Betterment customer’s trades and resulting positions can be fractional—down to 1/1,000,000th of a share—putting every dollar to work while allowing every investing goal to be perfectly diversified according to its target allocation. This is part of Betterment’s unique sophistication.

In practice, it also makes our service equal opportunity for all investors. It means an investor with a $2,500 account receives the same diversification benefit as one with a $2.5 million account (and we don’t require a minimum balance). And every investor has the benefit of automatic, perfectly allocated dividend reinvestment, with no odd amounts just being wasted in cash.

How it works

To see how fractional shares look in a real-life example, here’s how $100,000 is actually invested at a 70% stock allocation in our portfolio.

Ticker Price per share (from 10/31) Percentage in 70% stock portfolio Dollar value in $100,000 portfolio How many shares required?
SHV $110.24 0 $0 0.000
VTIP $49.47 0 $0 0.000
AGG $107.9 10.4 $10,400 96.386
LQD $115.2 5.2 $5,200 45.139
BNDX $50.05 10.3 $10,300 205.794
VWOB $77.75 4.2 $4,200 54.019
VTI $91.39 12.9 $12,900 141.153
IVE $81.75 12.9 $12,900 157.798
IWS $63.7 4.1 $4,100 64.364
IWN $94.58 3.6 $3,600 38.063
VEA $40.85 30.1 $30,100 736.842
VWO $41.87 6.3 $6,300 150.466

Note: For clarity in the table, we’ve rounded to three decimal places, but our algorithms trade to six decimal places.

What does our fractional share platform mean for you?

  • You are more likely to reach your goals faster because all the money you have available for investment is always working for you. If you want to invest $100,000 that’s what we do. Not $99,987 or other smaller amount.
  • You choose exactly how much to invest; we do all the math for you. You never have to think about the cost of any individual asset when you make deposits or withdrawals from your portfolio.
  • Your goals are properly diversified on an ongoing basis. We’ve already discussed how Betterment strategically uses your cash flows (dividends, deposits) to rebalance your goals, keeping your tax bill low by minimizing the need to rebalance by selling. Betterment’s trading algorithms work with six decimal points of precision, using all incoming funds (even odd amounts like dividends) to shore up any imbalances in your positions, no matter how tiny.

And if you have an investment account with leftover cash just sitting there, ask yourself: If I didn’t want that money invested, why would I have put it there in the first place?