Robinhood’s ETF Ripple

With self-directed investing growing, fund managers face a choice in appealing to the app-trader class.

Reviewed by: Dan Mika
Edited by: Dan Mika

Robinhood’s IPO began trading today, months after it became the prime arrow in the quiver of investors joining the retail boom of last year.

The stock debuted at $38 per share, valuing the company at $32 billion. It dived as far as 11% at the start of trading before recovering to end a whipsaw day down 8.4%, at $34.82 per share.

Without it, the massive GameStop short squeeze would never have sent the retailer’s stock to the moon. AMC would still be reeling from pandemic-related closures instead of raising $587 million after its shares were buoyed by meme retail stock traders.

The Elon Musk-fueled cryptocurrency Dogecoin wouldn’t have reached nearly $94 billion in market capitalization within the wild first six months of finance in 2021 without Robinhood providing easy access to crypto trading world.

Under Regulatory Spotlight

At the same time, regulators are still looking into the company’s practices into selling order flow, halting trading of GameStop stock at the height of the squeeze and handing out leverage margin with questionable oversight.

Case in point: the Financial Industry Regulatory Authority issued the largest fine in its history against Robinhood in late June, charging it $70 million for a slew of customer protection violations. Then some 24 hours later, Robinhood issued its initial public offering documents with the intent of raising billions of dollars.

An IPO is a signal that a company believes it’s ready for the challenge of the scrutiny of finance’s biggest stage. Robinhood is betting that self-directed investing is the future, and that includes exchange-traded products.

So what does that mean for ETFs?

Retail Already Loves ETFs

It’s not exactly clear what ETFs Robinhood users favor the most.

Although Robinhood previously made that data publicly available, it closed off that data stream in August 2020. Months before that closure, an analysis showed that the most widely held ETF at the time was the United States Oil Fund LP (USO), despite the commodity being at its lowest price in years due to the pandemic.

The other Robinhood favorites at the time were a mix of S&P 500 and total stock market trackers, thematic ETFs and several leveraged products following energy and gold.

Without that data, it’s difficult to discern what purchases of securities were done by retailer investors versus registered firms in anything resembling real time.

A Peek At Retail ETF Usage

Robinhood declined to offer specifics on ETF trading on its platform for this story.

However, research from VandaTrack estimates that retail investors have favored ETFs for years.

Net flows into the top 100 ETFs by assets under management have been higher than purchases of the broad basket of stocks in the Russell 2000 since 2014. That gap soared in January 2020 as Robinhood was thrust into the spotlight by traders armed with GameStop call options and rocket ship emojis.



Vanda Research senior strategist Viraj Patel said individual investors bought approximately $6 billion worth of ETFs in the first 20 days of July, the highest since the recovery from the COVID-19 lockdown-generated market crash started last April.

“This is something that we see in a more defensive market ... falling retail conviction over single names, but investors buying the dip with broader trackers to still get exposure,” he said.

Thematic Advantage

Samuel Masucci, CEO of ETF Managers Group, said approximately 83% of assets held by the company’s funds were from self-directed or smaller advisors, rather than institutional investors, and that more than 50,000 Robinhood users hold the group’s funds.

He said thematic funds like the ETFMG Alternative Harvest ETF (MJ) have garnered millions of investments ranging around $1,000 to $1,500, a signal that smaller investors are using ETFs to get exposure instead of building a basket of their own stocks.

“I think that most people have now seen that while they could be very successful with their advisor or on a self-directed basis in picking important themes, they're generally not very good at picking stocks,” he said. “ETFs are just getting rid of that single-stock risk.”

For that reason, ETFs can make for a natural fit in self-directed portfolios, especially among investors without the time or training to dig through the history of a security to determine whether it’ll go up or down.

Marketing To Retail Investors

Meme stocks aside, Robinhood’s largest impact on the financial world isn’t just no-commission trading, but forcing traditional brokers like TD Ameritrade and E-Trade down to zero fees to compete with it.

So if there’s less of a middleman between the buyer and the issuer, how does that change how issuers market their funds?

Pat Cleary, chief operations officer and chief compliance officer at ETF Architect, said the process of preclearing all marketing materials through FINRA can cause problems for issuers who want to promote their funds more aggressively on social media. The flow of information through a Twitter thread or a YouTube video is far faster than through a pamphlet, and likely far faster than what regulators can clear in a reasonable time.

Cleary believes regulators will have to adapt to that newer distribution paradigm while avoiding taking a regulatory position that could be swayed to benefit large issuers.

While the largest ETF issuers can build their asset base through their existing distribution channels, placing too many restrictions on social media as a way to disseminate fund information could hamstring newer and smaller issuers from winning market share.

“It’s in the entrenched players’ interest to lobby for very stringent social media policies and restrict social media as a channel, because frankly, that's just a source of competition for them,” he said.

Contact Dan Mika at [email protected], and follow him on Twitter

Dan Mika is a reporter for He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.