Robinhood Investors Are Being Smart With These 4 ETFs

Robinhood investors get a bad rap. Criticism of their favorite stock picks abound, ranging from a marijuana stock that's consistently diluted its shareholders to a shipping company that has repeatedly had to perform reverse stock splits just to stay listed on a major U.S. stock exchange. You'd think that Robinhood investors have no investing acumen whatsoever.

But not everyone uses the app simply to speculate on individual stocks. Exchange-traded funds also have gained in popularity among many of its users, and some ETFs that make exceptionally good choices are among the most popular on Robinhood, held in as many as 125,000 of its portfolios. These picks are also relatively conservative, which flies in the face of the idea that every Robinhood investor is an unreasonable risk-taker.

Data source: Robinhood. As of July 20, 2020.

Let's look at these ETFs to see why they're smart picks for anyone looking to put money in the stock market.

Matching the market -- at low cost

You don't have to pick individual stocks in order to be a successful investor. Over time, just matching the broader stock market's performance has been enough to turn modest investments into a substantial nest egg. That's exactly the idea behind the group of ETFs tracking the S&P 500 Index: to provide market-matching returns that will grow in lockstep with the biggest companies in the U.S. stock market.

The Vanguard and SPDR ETFs are nearly identical. Both follow the S&P 500 and both have low expense ratios. With costs of 0.03% per year, the Vanguard fund costs Robinhood investors $6 less annually for every $10,000 they invest than the SPDR ETF with its 0.09% expense ratio. However, the SPDR ETF has a lot more trading volume, which makes it easier to buy and sell frequently. Either of these funds makes a good pick whether you're on Robinhood or not.

Image source: Getty Images.

Looking to minimize ups and downs

The bear market in February and March reminded investors that matching the broader market can make for a bumpy ride. Some may naturally want a smoother investing experience, and for those investors, the Invesco S&P 500 High Dividend Low Volatility ETF seeks to combine two themes and deliver solid returns with fewer ups and downs. The fund gravitates toward stocks that offer high yields and generally move less violently than the overall market, especially in times of stress.

Unfortunately, the strategy doesn't always work. Investors in this Invesco ETF have found that out the hard way in 2020, as it has lost 24% of its value so far this year. Outsize sector bets in financials and real estate are largely to blame, but it's also important to remember that this particular bear market has been unusual in the way it left growth-oriented tech stocks largely untouched even as it hammered stocks that would normally be conservative picks. Over longer periods of time, minimum volatility ETFs like this one have done a better job of meeting their investment objectives, and it's reasonable for Robinhood investors to expect the Invesco ETF to bounce back along with the individual stocks that make up its portfolio.

Betting on the whole market

S&P 500 index funds, with their exclusively large-cap holdings, aren't enough to satisfy some investors. If you want exposure to mid-cap and small-cap companies as well, an ETF like Vanguard Total Stock Market (VTI -0.79%) will fit the bill better.

Vanguard Total Stock invests in companies of all sizes, tracking an index that includes a much broader set of stocks than the S&P 500. Large-cap exposure still dominates the ETF, but the roughly 20% of its portfolio that's invested in mid-sized and small companies can have a significant impact on overall returns. With smaller stocks beating large stocks over the long haul, Vanguard Total Stock is a solid and inexpensive choice for long-term investors.

Yes, Robinhood investors sometimes make smart choices

It's not fair to paint all Robinhood investors as day-trading risk-takers. Some of the ETFs that many of them use would be prudent choices for any investor. It just goes to show that at least some users of the mobile trading app are making smart choices in the ETF universe.