Robinhood Traders Are Betting Billions on These Investments

Written by on January 9, 2021

Robinhood rocketed to recognition amongst younger traders in 2020 amid unprecedented market volatility, and it is no shock that there was lots of consideration paid to what the trading platform’s users are investing in. 

Merchants utilizing Robinhood are typically extra energetic than most, and whereas the app’s customers have made plenty of good buys, a few of what they’re buying are undoubtedly questionable investments. And one explicit kind of funding widespread amongst Robinhood traders may probably match into both of those classes, relying on the specifics. 

Picture supply: Getty Pictures.

Robinhood customers guess large on this kind of funding, however is it a sensible one?

Whereas shopping for particular person shares is frequent amongst Robinhood customers, its traders additionally flock to a different kind of funding: thematic ETFs. In accordance with a Bloomberg analysis, the platform’s customers have bought greater than $20 billion value of them, together with over $2.5 billion in November 2020 alone. 

Because the title suggests, thematic ETFs are exchange-traded funds organized round a specific theme that gives publicity to a selected kind of area of interest funding. For instance, you possibly can purchase one that provides you publicity to corporations within the marijuana business or to telemedicine or pet merchandise. Thematic ETFs differ from these monitoring broader market indexes, equivalent to ETFs that mimic the efficiency of the S&P 500, since you’re betting not on the expansion of the market as an entire however on a specific kind of enterprise performing effectively. 

Investing in thematic ETFs is usually a good transfer when you imagine sure industries are prone to outperform however you do not need to take the time to establish particular person corporations poised to profit from outsize progress. They can be much less dangerous than investing in particular person corporations. In case you purchase simply one marijuana firm, you are taking a a lot greater gamble than when you acquire publicity to a number of cannabis-related companies along with your ETF buy. 

Thematic ETFs lets you transcend simply attempting to imitate market efficiency with out requiring you to discover ways to analysis inventory fundamentals, however there’s an necessary caveat. Because you’re not simply choosing an ETF that tracks the market as an entire, it’s good to do some extra analysis to verify your funding is a sound one. 

One other have a look at prime Robinhood investments exhibits why that is so necessary. Two thematic ETFs particularly widespread on Robinhood final 12 months had been ETFMG Different Harvest (NYSEMKT:MJ), which invests in corporations within the cannabis industry, and the crude-oil tracking United States Oil Fund (NYSEMKT:USO) — neither of which had been essentially sound investments final 12 months, as my Motley Idiot colleagues defined within the included hyperlinks.

The hazard in thematic ETFs is that they make it appear simple to capitalize on traits that seem inevitable, like the expansion within the marijuana business or the rebound of oil costs. However finally the efficiency of every particular person fund relies on the energy of its underlying funding combine. In different phrases, not each ETF that goals to trace the marijuana business (or oil costs, or every other funding area of interest) will essentially do a very good job of it. 

Whether or not you are utilizing Robinhood or every other buying and selling platform, deal with thematic ETFs identical to every other funding. Take a look at their monitor report, understand exactly what you’re buying, and make a completely knowledgeable alternative about whether or not the funding is a sound one. Do not assume an funding is secure simply because it is an ETF, and do not rely on it mimicking the efficiency of an business as an entire simply because its title suggests it’ll.

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