Does ETF fractional shares pay dividends? Small investments don't have to give up receiving dividends.

The global ETF market has experienced remarkable growth over the past three decades. Since the first ETF debuted in 1990, the market size has risen from $212 billion in 2003 to surpass $1 trillion for the first time in 2009, and again exceeded $10 trillion in 2021. According to industry statistics, the total assets of listed ETFs worldwide have reached $11.61 trillion, with an average annual compound growth rate of 22.16% over the past twenty years.

Taiwan’s ETF market has also developed rapidly. Since the first ETF was launched in Taiwan in 2003, the market has expanded to 227 funds with assets totaling NT$3.56 trillion, more than doubling from NT$1.74 trillion a few years ago. However, a unique challenge in Taiwan is the “one lot” trading threshold—investors must buy in units of 1,000 shares. For retail investors with limited funds, some popular ETFs are quite expensive; purchasing one lot often requires a substantial investment. For example, Yuanta Taiwan 50 ETF, with a closing price of NT$161.65, costs NT$161,650 (over NT$160,000) to buy one lot, which can be a significant expense for many.

So, is there a way to invest in ETFs with less capital? More importantly, if I only buy fractional shares, can I still receive dividends?

Challenges and Solutions for Small-Amount ETF Investing

There are fundamental differences between the ETF purchasing methods in Taiwan and the US. US investors can buy any number of shares, while Taiwan’s market is limited by the “one lot” system. This restriction creates three main issues: first, high capital thresholds; second, difficulty for small investors to enter; third, many investors who want to accumulate ETF holdings through regular savings plans cannot do so effectively.

Fortunately, Taiwan’s securities market has introduced a solution—the ETF fractional share trading system. This allows investors to buy between 1 and 999 units of ETF shares, opening new opportunities for small investors. However, fractional trading differs from whole-lot trading in trading hours, fee calculations, and settlement rules, so investors need to understand these differences to make informed decisions.

Rules and Cost Analysis of ETF Fractional Share Trading

Differences in Trading Hours

Fractional ETF trading is divided into two sessions: intraday and after-hours. Intraday trading runs from 9:00 to 13:30 but is limited to electronic orders; after-hours trading is from 13:40 to 14:30, where orders can be placed via phone or counter. Both sessions use limit orders (ROD valid for the day), with trades matched via call auction. During intraday, matching occurs every minute; after-hours, all matching is completed at 14:30.

Note that partial fills are common in fractional trades. For example, if you place an order to buy 100 shares but only 50 are matched, the remaining 50 will wait for the next matching opportunity.

Fee Calculation Logic

The transaction fee for fractional shares is calculated the same as for whole shares:

Fee = Share Price × Number of Shares × 0.1425%

If your broker offers a discount (e.g., 35% off), multiply by the discount factor. For example, buying 200 units of Yuanta Taiwan 50 ETF (price NT$161.65) with a 35% discount:

200 × 161.65 × 0.1425% × 0.65 ≈ NT$29.95

Many brokers have minimum fee thresholds. Previously, most set a minimum of NT$20; due to increased competition, many now lower this to NT$1. This means fees are charged at the calculated amount only if it exceeds NT$1; otherwise, NT$1 is charged.

For example, buying 5 units of the ETF (5 × 161.65 × 0.1425% ≈ NT$1.15) exceeds the NT$1 minimum, making the fee reasonable. Beyond this point, the per-unit cost remains manageable.

Additional Trading Tax

When selling fractional ETF shares, besides the fee, a transaction tax of 0.1% applies. Selling 200 units at NT$161.65 results in total costs of:

200 × 161.65 × (0.1425% + 0.1%) ≈ NT$78.4

The Key Question: Do ETF fractional shares pay dividends?

Yes, fractional ETF shares can receive dividends.

This is a major advantage and one of the most appreciated features of the fractional share system. Whether holding 1,000 shares or just 1 share, investors can receive dividends proportionally. The more shares held, the higher the dividend income.

This feature has fueled enthusiasm among Taiwanese investors for “buy-and-hold” strategies. According to the Taiwan Stock Exchange, most popular dollar-cost averaging investments are high-dividend ETFs. Many investors use monthly fixed amounts to buy fractional shares of high-dividend ETFs, accumulating assets and enjoying steady dividend income—this is the core appeal of the dollar-cost averaging method.

For example, if an investor invests NT$3,000 monthly in a high-dividend ETF that pays monthly dividends, over three years they could accumulate about NT$100,000 worth of holdings. Although purchased gradually via fractional shares, each share participates in dividend distribution from the first month. Over three years, the dividend income could total several thousand NT dollars, providing a substantial passive income stream.

Comparing Small-Amount Investment Methods: Fractional Shares, Whole Shares, and CFDs

Investors have multiple options for small-amount ETF investments, each with pros and cons:

Direct purchase of fractional shares is the most traditional and straightforward. Advantages include actual asset ownership, dividend entitlement, and clear tax implications. Disadvantages are lower liquidity, longer wait times for transactions, and wider bid-ask spreads compared to whole shares.

CFD (Contract for Difference) trading offers an alternative. CFDs allow leveraged trading—for example, using 10x leverage to trade iShares Semiconductor ETF, where NT$222 of capital can control NT$2,220 worth of shares, greatly lowering the entry barrier. CFDs support both long and short positions, operate 24 hours, and often have lower transaction costs. However, CFDs are derivatives, do not involve actual ownership of the underlying asset, do not pay dividends, and carry leverage risks.

Practical Tips and Precautions for Fractional Share Trading

Optimizing Order Placement for Better Execution

During after-hours, a single auction occurs at 14:30. Investors can adopt different strategies based on stock liquidity: for popular ETFs with high volume, placing buy orders at the limit-up price or sell orders at the limit-down price can improve chances; for less liquid ETFs, slightly undercutting the closing price may help fill orders; otherwise, placing orders at the closing price is common.

Understanding Bid-Ask Spreads and Execution Times

Fractional share prices often differ from whole shares, with wider spreads due to separate matching pools. In quiet market conditions, fractional trades may take longer or fail to execute. Investors should check the Taiwan Stock Exchange’s daily after-hours fractional trading summaries to assess liquidity.

The Golden Rule of Dollar-Cost Averaging

Many investors use monthly fixed amounts to buy high-dividend ETF fractional shares as a long-term passive income strategy. Success depends on selecting liquid ETFs (usually larger market cap, more constituents), setting reasonable investment amounts to keep fees manageable, and maintaining discipline over the long term, avoiding short-term market fluctuations.

Alternative: US Market Fractional ETF Investing

In the US, investors can buy ETFs without the “one lot” restriction. For example, Firstrade allows investors to specify any number of shares (e.g., 10 shares of SPY), supports market and limit orders, with order validity up to 90 trading days. Many US brokers have eliminated commissions on fractional ETF trades, making small, frequent transactions very cost-effective.

Summary

The introduction of the fractional share system has fundamentally changed small-investor participation in Taiwan. Fractional ETF shares not only pay dividends but are also excellent tools for asset accumulation and passive income. Whether a long-term income-focused investor or a beginner practicing dollar-cost averaging, fractional trading offers a suitable approach. The key is understanding trading rules, calculating costs, mastering techniques, and aligning choices with personal capital and investment goals.