Juicy yields have driven retail investors into fixed income — and now one digital brokerage firm is betting they’ll want to take it a step further and buy slices of bonds. Public announced its fractional bond offerings in December, after testing the strategy with six-month Treasury bills earlier in 2023 to great success, said Sam Nofzinger, the investing platform’s general manager of brokerage. The full rollout, which Nofzinger said will “revolutionize retail investing,” will occur in the next few weeks. Investors will be able purchase pieces of corporate bonds, Treasurys and eventually, municipal bonds. The idea is to open up opportunities to investors who don’t want to spend upward of $1,000 on single corporate bonds. “The ability to fractionalize bond investing allows that ticket size to come down and allows more folks to participate and build diversified bond portfolios,” Nofzinger said. Right now, the minimum investment is $100. While retail investors can buy individual corporate bonds through brokerages, they often opt for mutual funds or exchange-traded funds, which offer baskets of diversified bond securities. The iShares Broad USD Investment Grade Corporate Bond ETF (USIG) , for instance, tracks the ICE BofA U.S. Corporate Index. USIG 1Y mountain One-year performance of the iShares Broad USD Investment Grade Corporate Bond ETF Yet, Nofzinger thinks many investors want to own specific names. In fact, the vast majority of its three million members are buying individual stock positions over ETFs, even though the latter is also available on the platform, he said. Public anticipates they’ll want to do the same with bonds. “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,” Nofzinger said. “They want to build a portfolio that is exactly tailored to their needs, and not rely on some kind of sum-of-averages portfolio, like an ETF, to tackle that market.” When it comes to Treasurys, investors can either invest in an ETF or buy the government bonds directly through the TreasuryDirect website, which also has a $100 minimum. Nofzinger argued Public’s platform is much more user-friendly than the government’s website. Investors can also sell Treasurys through Public, which they can’t do through TreasuryDirect, he said. Fractional shares vs. ETFs Still, for certified financial planner Chuck Failla, ETFs are the way to go due to their low fees and easy liquidity. “There’s no shortage of low-cost ETFs in the 10-basis-point range,” said Failla, founder of Sovereign Financial Group. “From my perspective, I’m not really seeing the value of those fractional shares.” Public is charging between a 10- and 25-basis-point markup on each bond trade, which Nofzinger called “the standard markup model.” However, the company is working through ways to reduce prices further, he said. There are also so many different bond offerings available, said Tom Kaiser, portfolio manager with Sheaff Brock Investment Advisors. The firm is ranked No. 10 on CNBC’s 2023 Financial Advisor 100 list. “It would be hard to pick through them all, when you can just pick a fund and be done with it,” he said. When it comes to choosing a Treasury ETF, Failla looks for the least expensive. For corporate bonds, he suggests looking at actively managed funds, particularly for noninvestment grade and municipal bonds. Still, when investors hold bonds to maturity, they get back the par value, or face value, of the bond, which doesn’t happen with traditional funds. With an ETF, “you’re not able to say, ‘hey, you know, I’m buying my house in five years, I want a portfolio of Apple and Microsoft bonds that mature right at five years, so that when I’m buying my house, the money’s in the bank,'” Nofzinger said. “You can become a lot more tailored with your bond exposure by going directly as opposed to ETFs.” That said, there are products that are maturity specific, Failla said. Both BlackRock and Invesco both offer defined maturity ETFs that provide diversity like traditional funds but have maturities and liquidate like a bond. “It’s really hard these days to really justify [owning] individual names, if you have to go into that fractional ownership,” he said.
