Fractional Shares Vs. ETFs: What’s a Better Way to Diversify?

There’s a reason investors are constantly urged to diversify their holdings. Maintaining a diverse investment mix could be your ticket to growing serious long-term wealth.

Just as importantly, you need a diverse portfolio to safeguard against losses. Imagine you load up on heavily on a single company whose share price plummets following a bad earnings report. That could cause your portfolio to take a serious hit. But if that company consists of just 5% of your total portfolio, the hit won’t be as bad.

In fact, a diverse portfolio could be just the thing that helps you weather stock market turbulence — something investors have been more than familiar with in recent weeks. But when it comes to diversifying, you have options.

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First, you could load up on fractional shares, which allow you to own a piece of a share of stock rather than a full share. Fractional investing makes it possible to own more individual companies, whereas limiting yourself to full shares could leave you with less wiggle room in that regard.

You can also branch out in your portfolio by buying broad market ETFs, or exchange-traded funds. With ETFs, a single investment adds a whole bunch of different stocks to your portfolio so you don’t have to hand-pick companies yourself.

There are benefits and drawbacks to both fractional investing and ETFs. And so the question is: Which strategy should you use for portfolio diversification?

The pros and cons of fractional shares

If you buy the right companies, your portfolio might easily outpace the broad market and make you very wealthy over time. And fractional shares make it so that even companies with expensive share prices aren’t necessarily out of reach financially.

On the other hand, it take a lot of research to hand-pick individual stocks. You need to dig into companies’ financials and determine whether those companies’ share prices are really reflective of their actual value. That requires a fair amount of time and patience that you may not have. And if you make too many bad calls, you could end up taking losses in your portfolio, even if you’re limiting your exposure to individual companies by purchasing fractional shares.

The pros and cons of ETFs

The great thing about ETFs is that they take the guesswork out of investing. You don’t need to dig deeply into individual stocks when you buy ETFs since you don’t get a say in how you’re investing.

But that can also be a bad thing. If you’re a hands-on investor, ETFs may not work for you. And also, ETFs won’t let you beat the broad market. If you buy S&P 500 ETFs, for example, you might see comparable growth in your portfolio to what the S&P 500 itself delivers over time. But if you have loftier goals, then you may be better off with fractional investing.

What’s the right call?

One of your key objectives as an investor should be to maintain a diverse mix of stocks. You can get there with both fractional shares and ETFs, so think about which route better aligns with your strategy.

Remember, too, that you don’t need to limit yourself to one option over the other. You can load up on ETFs and then branch out with fractional shares if there are specific companies you think will really serve your portfolio well over time.

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