Putting your cash to work

+ what's the big deal about fractional shares?

Issue #13. 

Happy Friday to all of you, and welcome to our issue #13, the first weekly issue for November. In this week’s edition of the Gist, we’ll discuss the meaning and importance of fractional shares, current “gold rush” and putting your cash to work.

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You can also ask us any finance or investment question privately by visiting AskFinny.com.  We will share the most insightful questions and answers with our Gist audience.

So here are the questions for today’s edition: 

  1. What’s the big deal about fractional shares?

  2. What’s driving the price of gold? Should I jump into it?

  3. I’m looking to put cash to work in my investment accounts. Can you give me some ideas on how to do this?

Let’s give you the summary first.

Summary

  1. Fractional shares allow investors to buy half-shares of costly exchange-traded funds. This is great for beginner investors, for whom some of the popular ETFs (e.g., VOO, IVV or SPY) are quite pricey. Fractional shares could also open up the market for ETF investing in retirement accounts, as well as the market for direct indexing.

  2. Here is a chart from BlackRock that visually explains why the price of gold has been increasing. The key culprit is rising geopolitical uncertainty. Gold is a speculative investment—most investors use it as a hedge, not a core security. Here are some ways to get into it if you’re interested.

  3. If you’re holding cash in your investment accounts, there are some ultra-short-term bond ETFs that you can use to put it to work. The most important things to know about those ETFs are the yield (income), quality of income (will they continue to pay solid income in the future?), and the risk (are the underlying bonds in a distressed state). In no particular order, we suggest you take a look at State Street BIL, and BlackRock SHV and ICSH. Here is the comparison.

Deep Dive

  1. Fractional shares are a big deal.  That basically means investors are now able to buy half-shares of costly exchange-traded funds. This is particularly valuable to brand new investors who don’t have a lot of money to deploy, because fractional shares make managing a more balanced portfolio easier at smaller asset levels.

    In the past, 401k retirement accounts didn’t typically include ETFs because account managers couldn’t purchase fractional shares via dollar-cost averaging, a process that allows the partial purchase of an equity regardless of price.

    Now fractional shares could open up the market for ETF investing in retirement accounts. They could also open up the market for direct indexing, which is the process of putting together portfolios of individual stocks that look like index investments. This intermediates the whole packaged portfolio business.

  2. Despite the recent bullish run, gold as an asset has not appreciated significantly over the years. Some analysts claim gold has an upside, because of the rising political instability in the world, escalating global recession risks, and growing inequality between the rich and the poor. Most investors use gold as a hedge, not a core security.

    Here are a few options for investing in gold:

    • Gold bullion, though it may be impractical for many people who don't want to hold physical assets. Also, another big disadvantage to owning gold bullion is that it tends to trade with a wide spread between bid and ask prices. So don’t expect to turn a fast profit--hold it as a defensive asset over a long term.

    • A more practical way to invest is via gold trustsTwo popular trusts are BlackRock's IAU and State Street's GLDBoth of these funds carry gold as an asset.

    • You can also invest in gold miner ETFs, companies that mine for gold. Some of these funds are riskier/more speculative, because they own stocks of junior gold miners (which are less likely to own productive mines). One way to find out about gold miner ETFs is to ask Finny for "gold miner ETF". Hint: VanEck GDX is a popular choice.

  3. A recent study by CNBC determined that wealthy, younger investors are pulling back on their US stock investments.

    While holding cash is seldom a good long-term option, you can use ultra-short-term bond ETFs to put that cash to work before you decide your next move.

    Of course, investing in short-term bonds comes with a certain level of risk, particularly if their investment grade is low.

    State Street BIL, BlackRock SHV and ICSH are some popular investment options you can use to put your cash to work, but please do your research, read their prospectuses and make sure you can answer the following questions before investing in these ETFs:

    • What is the credit quality of bonds represented in those securities?

    • What is the income level generated by those bonds? What is the future prospect of that income?

    • Are there any special tax considerations you should be aware of?

That’s it for this edition.  What would you like to hear about in the next Gist?  Ask us a question here.

The AskFinny Team