What is Fractional Fixed Income?

In this article, we explore the exciting new world of fractional fixed income, explain its potential benefits and drawbacks for Broker-Dealers and RIAs, and share some of the considerations in deciding how your firm can expand its offerings.

Contents:

• What is Fractional Fixed Income?
• Common Fractional Fixed Income Securities Firms Can Offer
• Potential Benefits of Offering Fractional Fixed Income Trading
• Potential Drawbacks of Offering Fractional Fixed Income Trading
• How to Bring Fractional Fixed Income to Your Firm

What is Fractional Fixed Income?

Fractional fixed income refers to the practice of buying and selling portions (or fractions) of individual fixed income securities, such as bonds and certificates of deposit.

Like traditional fixed income, these securities typically pay investors fixed sums on predefined schedules with specified maturity dates; interest and dividend payments for fractional assets are proportionate to the amount of the investment.

Unlike fractional share trading, which has spiked in popularity since 2019, fractional fixed income is still in its infancy. In fact, Apex Fintech Solutions Inc. (“Apex”) introduced the industry’s first fractional fixed income investing platform in October of 2023¹, with a projected launch later in 2024.*

To learn more about Apex’s fractional fixed income investment platform, projected to launch later in 2024, click here.

Fractional Fixed Income Securities Example

Bonds

Apex’s Fixed Income API will enable Brokers and RIAs to offer their end clients fractional bonds for a select portion of available bonds.

The API provides information regarding the loan’s maturity date and any terms for fixed (or variable) interest payments.

Potential Benefits of Fractional Fixed Income Trading

Reduced Barriers of Entry

With single assets often requiring minimum investments in the thousands of dollars, brokers and RIAs are sometimes restricted in what they can offer retail investors, who in turn can be restricted by their ability to afford a security outright. Like other forms of fractional trading, however, fractional fixed income provides Brokers and RIAs the opportunity to offer their customers the ability to buy and sell portions of fixed income securities — effectively sidestepping the higher minimum investment requirements typically associated with high-yield products.

In fact, with Apex’s fractional fixed income platform,* Financial Advisors can enable investors with only $100 to begin investing in long-term, higher-yielding securities, such as select bonds and treasury securities.

Portfolio Diversification

By reducing minimum investment requirements for your clients, fractional fixed income can also help your retail investors build diversified portfolios at more affordable rates. Specifically, clients can use fractional trading to invest a set percentage of their budget into multiple different fixed income securities, even if they cannot afford an individual asset’s minimum investment requirements.

For example, if your client had a $5,000 budget, they could choose to invest 10% of their funds into 10 different fixed income securities with varying interest rates and maturities, regardless of an individual asset’s set price.

Stability & Predictability

While no investment is risk-free, fixed income securities typically offer your retail investors more stable and predictable outcomes than stocks and equities. This is largely due to the inherent nature of fixed income securities.

Many of the fixed income securities available via Apex’s Fixed Income API are backed by government entities, which may offer some protection from market volatility and default risk. Even corporate bonds typically have lower risk of default than equities, as they are backed by the financial viability of the issuing company; in the case a company does declare bankruptcy or liquidation, bondholders have a higher claim to company assets than common shareholders.

In terms of predictability, fixed income products available via Apex’s Fixed Income API (fractional and whole) establish timelines and rates for interest, dividend and maturity payments.

Together, these securities can help your customers offset losses from riskier investments and diversify the risk of their portfolios.

Tax Implications

To incentivize investors, government and municipal bonds sometimes offer tax-free benefits on interest payments.

Different fixed income products available via Apex’s Fixed Income API will have different implications depending on multiple factors, including the state or municipality the bond is issued, the domicile of the investor, and the tax classification of investor.

Importantly, not all fixed income investments receive tax-free benefits. Corporate bonds, for example, are fully taxable at all levels. Investors should consult with their own tax professional prior to investing.

Additional Considerations for Fractional Fixed Income Trading

Accessibility to Funds

Unlike a typical savings account, fixed income products can have terms and conditions that restrict an investor’s ability to access their principal investments until maturity. For example, banks will often penalize investors for making withdrawals before their CDs reach maturity.

Brokerage Transfers

While Apex’s fractional fixed income platform is scheduled to launch in 2024, its release does not mean the investment opportunity will be immediately available for every investor. Like any other innovation, we expect fractional fixed income will be gradually adopted by brokerages, fintechs, and financial advisors.

This means that there will be a period where some brokers and advisors may offer fractional bond trading, while others may not. In turn, investors may experience roadblocks if they try to transfer their fractional fixed income securities from one broker to another. To be frank, until there is industry-wide adoption, it is likely that gaps in technological capabilities could prohibit investors from transferring fractional fixed income securities entirely.

Gap in Customer Knowledge

As a natural consequence of increased accessibility, fractional fixed income could introduce some retail investors to an entirely new asset class. In turn, a lack of knowledge could create confusion, miscommunication, and frustration among inexperienced investors. It’s important for introducing brokers and investment advisors to educate their customers to ensure they have sufficient knowledge in fixed income securities and trading in fractional fixed income securities prior to offering securities.

How to Bring Fractional Fixed Income to Your Firm

Currently, investors are not able to trade fractional fixed income due to industry-wide technological limitations. Fortunately, Apex Fintech Solutions is scheduled to launch the industry’s first fractional fixed income investment platform* later in 2024.

Designed with brokers and advisors in mind, Apex’s platform replicates the infrastructure, data, and workflow of equity trading — helping fintechs, traditional brokers, and financial advisors provide their clients a simpler, more cost-effective fractional fixed income investment experience.

Upon the platform’s launch, eligible investors will be able to purchase fractional Treasury Bonds for a minimum investment of $100.

If your firm is interested in bringing fractional fixed income to your customers, please contact our team to learn more about the new capabilities we plan to launch later in 2024. We look forward to innovating with you.

¹ “Apex to Launch Fractional Fixed Income, Opening Up Low-Cost Access for Retail Investors to Bonds in Industry First” ApexFintechSolutions.com. 3 Oct. 2023, https://apexfintechsolutions.com/news-resources/press-releases/apex-to-launch-fractional-fixed-income/

* Fractional fixed income investing is not currently available from Apex Clearing Corporation. Please contact your Apex representative for additional details including when and whether fractional fixed income investing will be available in your country, or to learn more about upcoming products and services. Certain fractional fixed income service features may not be available for all fixed income investments.

Nothing herein shall be construed as a recommendation to buy or sell any security. While we have made every attempt to ensure that the information contained in this document has been obtained from reliable sources, Apex is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this document is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained due to the use of this information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Apex be liable to you or anyone else for any decision made or taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages. Dissemination of this information is prohibited without Apex’s written permission.