Basket trading has been around for a while, but together with broader awareness and supporting innovations, such as fractional trading, it is becoming a way for some investors to better manage their portfolios.
What Is Basket Trading?
Basket trading is the idea that rather than buy an individual stock, like Apple
Not all brokerages offer this service but some such as Interactive Brokers and Fidelity do so with differing specifications. Interactive Brokers has fully scalable and customizable Basket Order system without additional charges. Fidelity offers Fidelity Solo FidFolios with a simpler interface as a premium service that costs $4.99/month.
These services and the concept of basket trading, make it easy to do what many investors are looking to do any way, easily move money in and out of their portfolio and rebalance as needed. That can be simpler than maintaining a disparate portfolio of stocks. At the same time, you can likely save money on fees. Investment funds, whether mutual funds or ETF carry an annual fee that can be as much as 1% or more of your fund’s value each year. That can erode the value of your savings over time.
Basket trading offer the option to skip the funds entirely, but achieve a similar investment result if the mix, is similar to what a passive fund would be invested in. That said, some investors are holding ETFs within baskets so there would still be fees in that scenario.
“We didn’t see a lot of usage of basket trading for a number of years.” Says Josh Krugman, Senior Vice President of Brokerage and Service Operations at Fidelity Investments. However, now Fidelity is seeing more interest from “more engaged investors, such as self-directed investors and traders” and has been surprised at how varied the usage has been, in terms of people building portfolio baskets from scratch, building ETF-based portfolios and modifying the supplied template portfolios. “What’s happening is even people who are using the templates, such as a clean energy portfolio, they tend to tweak those as well.”
Krugman argues part of the reason for the pick-up in basket trading has been related innovations in areas such as fractional trading. Previously trading a basket in whole shares meant baskets were often relatively expensive to trade in dollar terms. However, with fractional trading a customer can now specify a dollar amount to move in and out of their portfolio and it’s a simpler process, and more accessible to smaller investors.
As basket trading becomes more available, and more popular, it may offer investors a way to save money on fees that even passive ETFs would have charged. Rather than buy an ETF, holding the same underlying investments through a basket trading platform could be a way to cut investment fees out of your portfolio. At the same time it may be a way to make sure that the investments you hold are customized to your needs. If your ETF holds a stock you don’t want, there’s little you can do, but with basket trading you can just cut it from the basket.
Basket trading, even on simpler platforms, still requires a little time and effort and as a result is being used by more engaged investors today. Some may still prefer to have someone else managing their investments. However, basket trading may prove another way for certain investors to perhaps achieve slightly better outcomes over time given lower fees and greater customization when compared to investing via funds.
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