In the world of investments, fixed income securities have long been the go-to choice for retail investors seeking stable returns. However, recent developments in the financial industry are taking this traditional approach a step further. Public, a digital brokerage firm, is gearing up to revolutionize retail investing by introducing fractional bond offerings. This move aims to democratize access to corporate bondsUnited States Treasury securities are debt instruments issued by the United States government to finance its spending. Treasury securities come in a variety of forms, including bil... More, Treasuries, and eventually municipal bonds, allowing investors to purchase bond slices for as little as $100. In this article, we’ll explore Public’s innovative approach and the potential benefits it offers to retail investors.
Fractional Bond Offerings: A Game-Changer in Retail Investing
Sam Nofzinger, the General Manager of Brokerage at Public, announced the platform’s fractional bond offerings in December. This initiative follows the successful testing of fractional ownership with six-month Treasury bills earlier in 2023. According to Nofzinger, this strategy is poised to “revolutionize retail investing” by providing investors with a more accessible entry point into the bond market.
The primary goal of fractional bond investing is to reduce the investment ticket size, making it affordable for a broader range of investors. Currently, the minimum investment required is just $100, significantly lower than the typical price of a single corporate bond, which can often exceed $1,000. This democratization of bond investing opens up opportunities for retail investors who seek to build diversified bond portfolios without substantial upfront costs.
Investor Preference: Individual Bonds vs. ETFs
Retail investors have various options when it comes to bond investments. They can purchase individual corporate bonds through brokerages or opt for the convenience of mutual funds and exchange-traded funds (ETFs) that offer diversified bond securities. For instance, the iShares Broad USD Investment Grade Corporate Bond ETF (USIG) tracks the ICE BofA U.S. Corporate Index, providing exposure to a basket of investment-grade corporate bonds.
Interestingly, Public has noticed that the majority of its three million members prefer owning specific individual stock positions over ETFs, despite ETFs being available on the platform. This observation led to the belief that investors want more control, ownership, and a tailored approach when it comes to their bond investments.
Nofzinger explained, “There’s just something resonating with retail members that they want control, they want ownership, they want to understand these things at a very, very basic level.” This desire for control and customization has fueled Public’s belief that investors will embrace fractional ownership of bonds in the same way they have embraced it for stocks.
Public’s User-Friendly Platform for Treasury Bonds
While investors can access Treasury bonds through ETFs or directly via the TreasuryDirect website, Public aims to offer a user-friendly alternative. Nofzinger pointed out that Public’s platform provides a more accessible and intuitive interface for Treasury bond investments. Furthermore, investors can also sell their Treasury holdings through Public, which is not an option with TreasuryDirect.
Despite these advantages, some financial experts, like certified financial planner Chuck Failla, still favor ETFs for their low fees and easy liquidity. Failla noted, “There’s no shortage of low-cost ETFs in the 10-basis-point range,” suggesting that the fractional shares offered by Public may not provide significant value in his perspective.
Markup and Pricing
Public charges a markup ranging from 10 to 25 basis points on each bond trade, which Nofzinger described as the “standard markup model.” However, the company is actively exploring ways to further reduce prices for investors, making fractional bond ownership even more appealing.
Choosing the Right Investment
When it comes to choosing between individual bonds and ETFs, the decision often depends on individual preferences and investment goals. Tom Kaiser, a portfolio manager at Sheaff Brock Investment Advisors, highlighted the sheer variety of bond offerings available, making it challenging for investors to navigate the market. For those seeking simplicity, a bond fund or ETF may be the preferred choice.
Failla suggested that for corporate bonds, particularly non-investment grade and municipal bonds, actively managed funds might be a better option. Still, he acknowledged the benefits of individual bond ownership when investors intend to hold bonds to maturity and receive the bond’s face value, a feature not offered by traditional funds.
Nofzinger emphasized that individual bond ownership allows investors to tailor their bond exposure to specific needs, such as planning for future expenses like buying a house. He pointed out that with an ETF, investors have limited control over maturity dates and specific bond holdings.
However, Failla noted that there are maturity-specific products available, such as defined maturity ETFs from BlackRock and Invesco, offering a balance between diversification and bond maturity control.
Bottom-line: Public’s introduction of fractional bond offerings represents an exciting development in retail investing, providing investors with greater control and flexibility in building their bond portfolios. While individual preferences and investment goals will continue to dictate the choice between fractional ownership and ETFs, this innovation opens up new possibilities for retail investors to explore the world of bonds with ease and affordability.
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This content is provided for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above content might not be suitable for your particular circumstances. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor.
