Retail investors have become a significant part of the stock market, thanks to innovations such as online investing and commission-free trading. In fact, according to BlackRock, retail ownership of U.S. stocks has increased to nearly one-fifth of average daily trading activity. That number was in the low-single-digit percentage range prior to the COVID-19 pandemic.
A big reason for this is due to popular online brokerage Robinhood, which pioneered commission-free trading. Now, the market frequently looks at what's happening on Robinhood to gauge retail sentiment. Robinhood regularly publishes a list of the 100 most-owned stocks and exchange-traded funds (ETFs) on the platform.
Here are 5 ETFs that rank in the top 20 of this list of investments that Robinhood investors can't get enough of.
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Vanguard S&P 500 ETF and SPDR S&P 500 ETF Trust
I am grouping the Vanguard S&P 500 ETF (VOO 1.30%) and the State Street SPDR S&P 500 ETF Trust (SPY 1.27%) because, although they are run by different financial firms, both ETFs allow investors to get exposure to the broader benchmark S&P 500 index, which represents approximately 500 large-cap stocks in the U.S. across sectors.
Investors buy the S&P 500 to gain exposure to the broader market, so if you hear someone say they are overweight U.S. stocks, they are likely doing this through the S&P 500, which is most easily purchased through an ETF. ETFs are an easy way for investors to buy the broader market because they hold a basket of stocks, are typically inexpensive, and can be bought and sold as easy as individual stocks.
Given how well the broader market has done in recent years, it is no surprise that owning the S&P 500 is popular on Robinhood. At the same time, there is also great debate about the market-weighted index because so much of it is now made up of the large artificial intelligence stocks in the "Magnificent Seven," which a significant portion of investors believe are overvalued. So if the "Magnificent Seven" struggles, the entire S&P 500 may take a hit.
Other investors believe selling the AI giants will lead to rotation into the rest of the index. There has been some of that to start the year, but it remains to be seen whether the broader market can thrive if the "Magnificent Seven" struggles, because they may be more intertwined than some think.
Ultimately, investors can still own the S&P 500 through these ETFs, but it is no longer as diverse an investment as it once was. It also may be quite volatile over the next few years, so if you own it, be sure to have a long-term time horizon and practice dollar-cost averaging, or adding a set amount of money at set intervals no matter what the market is doing.
Vanguard Total Bond Market ETF
The Vanguard Total Bond Market ETF (BND 0.28%) provides exposure to a basket of taxable, investment-grade U.S. dollar bonds, excluding inflation-protected and tax-exempt bonds. Investment-grade bonds are high-quality from a credit perspective, although there can be different classes of investment-grade.
According to Vanguard, this ETF offers strong potential for investment income, as many investment-grade bonds pay strong interest semi-annually. These bonds don't move like stocks and can be better suited to investors who have a medium- or long-term investment horizon and are looking for reliable income.
When you hear investment advisors and strategists speak about the 60-40 portfolio that consists of 60% stocks and 40% bonds, this ETF would be a good way to contribute to the 40% portion. A significant portion of the ETF is still in government bonds, but about 30% of capital is invested in various investment-grade bonds from AAA to BBB. The average coupon of the portfolio is 3.8% and average duration is 5.7 years.
Vanguard FTSE Developed Markets ETF and Vanguard FTSE Emerging Markets ETF
Although these ETFs differ, I am grouping the Vanguard FTSE Developed Markets ETF (VEA 1.72%) and the Vanguard FTSE Emerging Markets ETF (VWO 2.22%) into this section because they provide investors with a way to gain exposure to international stocks.
The developed markets ETF provides investors the ability to buy a basket of diverse large-, mid-, and small-cap stocks in markets outside the U.S., including in Canada, Europe, and the Pacific region. The fund is passively managed and has a very low expense ratio. Nearly 52% of capital is allocated to European stocks, while roughly 35% is allocated to Pacific stocks. The largest three stocks in the ETF are ASML Holding, Samsung Electric, and Roche Holding.
The emerging markets ETF owns a basket of stocks from emerging markets, including China, Brazil, Taiwan, and South Africa. This ETF has high long-term growth potential, but is also quite risky because developing countries are more susceptible to government intervention and changes in leadership, which can lead to significant shifts in economic policies.
Over 99% of the ETF's capital is invested in emerging markets. Chip manufacturer Taiwan Semiconductor is by far the ETF's largest holding, accounting for nearly 11% of VWO's capital. Tencent Holdings and Alibaba Group are next on the list.
Ultimately, with the U.S. stock market trading at a rich multiple, it's a good idea to have some international exposure, which can trade at more attractive multiples and have higher growth ahead. However, one shouldn't be overweight in these ETFs, especially VWO, given the risks mentioned above for emerging markets.
