What is fractional investing for ETFs and why does it matter?

Investing has changed a lot in the past decade. Once upon a time, you needed a sizable amount of money to get started.

Today, with new technology and rules, almost anyone can invest with a much modest amount of money. One of the biggest reasons for this shift is something called fractional investing.

This has become especially important for UK investors because new rules mean you can now hold fractional shares inside an ISA – meaning any gains or income from those investments can be completely tax-free. For the current tax year, the ISA limit stands at £20,000.

So, what exactly is fractional investing? Why does it matter for ETFs (exchange-traded funds)? And how does it help beginners build stronger, more balanced portfolios?

Let’s take a look.

What is fractional investing?

Traditionally, when you wanted to invest in a company’s shares or in an ETF, you had to buy a whole share.

If an ETF cost £100 per share, you couldn’t just buy £10 worth of that share – you needed the full £100.

For many this was a problem. If you only had £50 to invest, you were locked out of many ETFs, stocks or bonds.

Fractional investing changes this. Instead of buying a whole share, you can buy a slice of it.

If you put £10 into that same ETF, you’ll own 0.1 of a share. It works just like slicing a cake – if you don’t want the whole cake, you can still enjoy a slice.

This means you can start investing with whatever amount you have, whether that’s £10, £50, or £500.

“Fractional investing is an important feature for retail investors as it allows them to build robust portfolios regardless of their investment size. This feature very much aligns to the values of the ETF market around providing fair and transparent access to high quality investments for all investor types.”

Ted Malcolm, Head of UK ETF distribution, J.P. Morgan Asset Management

Why ETFs and Fractional Investing Go Hand in Hand

ETFs (exchange-traded funds) are one of the most popular investment options today. Think of them as baskets of investments. Instead of buying a single share in one company, an ETF lets you buy into hundreds (or even thousands) of companies at once.

For example:

A UK stock market ETF might hold the 100 biggest companies listed on the London Stock Exchange as seen in a FTSE 100 ETF.
A global ETF could spread your money across companies in the US, Europe, Asia, and beyond as seen in a MSCI World ETF.
A thematic ETF might focus on areas like clean energy, technology, or healthcare.

ETFs are a great way to spread risk and diversify a portfolio, and when you add fractional investing, they become even more powerful. Instead of needing hundreds of pounds to buy full ETF shares, you can now invest small amounts across multiple ETFs.

For example, let’s say you have £100 to invest. Before fractional investing, you might have been able to buy one share of a single ETF. Now, you could split that £100 into:

£25 in a global stocks ETF
£25 in a UK bonds ETF
£25 in an emerging market stocks ETF
£25 in a clean energy thematic ETF

That’s four areas covered instead of one, giving you instant diversification, regardless of the investment budget.

How does fractional investing work?

If the stock market only trades in whole shares, how can you own just a fraction of it?

Here’s how it works in practice:

You place an order: You tell your investment platform that you want to invest, say, £20 into a particular ETF.
The platform buys full shares: Behind the scenes, InvestEngine buys whole ETF shares on the market.
Fractions are recorded: InvestEngine then divides those shares into smaller pieces and credits your account with your proportion.

So, while the stock exchange itself only deals in whole shares, InvestEngine makes it possible for you to own part of one.

For you, the investor, it looks simple: you own £20 worth of the ETF, regardless of its total share price.

Why does fractional investing matter?

Fractional investing changes the game for investors predominantly in three ways:

1. It makes investing accessible

You no longer need to wait until you’ve saved up hundreds of pounds to get started.

With as little as £100, you can begin building your portfolio. This makes investing far more approachable for beginners, younger investors, or anyone who wants to dip their toe in without committing large sums.

2. It helps you diversify

The golden rule of investing is “don’t put all your eggs in one basket.”

Diversification means spreading your money across different types of investments so that if one underperforms, the others can help mitigate this.

Fractional investing makes diversification easy. Instead of being forced to put £100 into just one ETF, you can spread smaller amounts across several. This reduces your risk and gives you a more balanced portfolio.

3. It supports regular investing

Fractional shares fit perfectly with strategies like pound-cost averaging, where you invest a set amount of money each month. For example, you might set up a direct debit of £50 into your ISA every month.

With fractional investing, that £50 can be split across multiple ETFs regardless of their share prices. Over time, this helps smooth out the impact of market ups and downs.

The ISA Rule Change: A Big Win for Investors

One of the biggest developments for UK investors recently, has been the change to ISA rules around fractional shares.

Before, only whole shares were allowed inside a Stocks & Shares ISA.

This meant fractional investing often had to take place outside of ISAs, where investors potentially faced taxes on dividends and/or capital gains.

Since November 2024, the rules have since been updated: fractional shares can be held within an ISA. That means you can enjoy the full benefits of fractional investing while keeping your gains and income completely tax-free.

This is especially powerful for beginners. You can now start with small sums, build a properly diversified portfolio inside your ISA, and let it grow tax-free year after year.

To conclude, fractional investing is a simple idea with a big impact. By letting you buy slices of ETFs instead of whole shares, it makes investing:

More accessible: You can start with just a few pounds.
More diversified: You can spread money across different ETFs rather than being tied to one.
More efficient: You can invest regularly and build habits that help your wealth grow over time.

And with the recent ISA rule change, fractional ETF investing is now not just easy but also tax efficient.

For beginners, this is fantastic news. You don’t need a large sum of cash to get started, and you don’t need to make tough choices between saving or investing. You can start small, build gradually, and take advantage of both diversification.

InvestEngine offers this in ISA, GIAs (general investment) and SIPPs (self-invested personal pension) accounts.

Fractional investing makes ETFs – and investing in general – more inclusive than ever before. Whether you’re starting with £10 or £1,000, you can now build a portfolio that works for you.

FAQs on fractional investing

1. What is fractional investing? Fractional investing lets you buy part of an ETF instead of the whole unit, making it easier to start with smaller amounts.

2. How does fractional investing work with ETFs? InvestEngine buys full ETF shares and records your portion. This means you can own £10 or £50 worth of an ETF, even if one share costs hundreds.

3. Why is fractional investing important for beginners? It lowers the barrier to entry. You can start investing with small sums and build a diversified portfolio without needing large amounts of cash.

4. What are the benefits of combining ETFs and fractional investing? Together they provide instant diversification, low costs, and flexibility, helping you spread risk across different markets with small investments.

5. Can I hold fractional ETF shares in an ISA? Yes. Since November 2024, UK investors can hold fractional ETF shares inside a Stocks & Shares ISA, keeping gains and income tax-free.

6. How much do I need to start fractional investing with ETFs? With InvestEngine, you can start with as little as £1 per ETF, or open an account with a minimum of £100.

7. Does fractional investing affect dividends? Yes. If your ETF pays dividends, you’ll receive them in proportion to the fraction of the share you own.

8. Is fractional investing safe? Yes. Fractional shares represent real ownership of part of an ETF. As with all investing, your capital is at risk and values may go up or down.

9. Can I set up regular investing with fractional ETFs? Yes. You can use strategies like pound-cost averaging, where fixed amounts are invested regularly, even across multiple ETFs.

10. Which accounts support fractional ETF investing at InvestEngine? You can invest fractionally through an ISA, SIPP, General Investment Account (GIA), or Business Account.

Important information

Capital at risk. The value of your investments may go down as well as up, and you may get back less than you invest.

ETF costs apply. If in doubt, you may wish to consult a professional adviser for guidance.

Tax treatment depends on your personal circumstances and may change in future. This article is for general information only and does not constitute financial advice.