A Beginner's Guide To Etf Investing On Robinhood

Exchange-traded funds (ETFs) are a popular investment vehicle due to their low fees and flexible trading opportunities. Robinhood, a top trading app for investors, offers approximately 500 ETFs to choose from, providing an excellent opportunity for those seeking to diversify their portfolios. With no commission fees on ETF trades, Robinhood makes it easy and accessible for individuals to invest in a wide range of assets, including stocks, ETFs, options, and cryptocurrencies. This article will provide a step-by-step guide on how to invest in an ETF on Robinhood, covering topics such as account creation, navigating the platform, selecting the right ETF, placing orders, and managing your investments.

Understanding ETFs

An exchange-traded fund (ETF) is a pooled investment security that can be bought and sold like an individual stock. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities. ETFs can even be designed to track specific investment strategies.

ETFs are bought and sold like a common stock on a stock exchange. They are traded and experience price changes throughout the day. They generally hold a collection of stocks, bonds, or other securities in one fund or have exposure to a single stock or bond through a single-security ETF.

ETFs are often designed to passively track a particular industry, index, or bundle of securities, so management fees tend to be lower than those of mutual funds. ETFs are also more tax-efficient than mutual funds.

ETFs provide a variety of benefits relative to other types of funds, such as mutual funds. The wide variety of ETFs available can make it easier to provide diversification to your portfolio. Different and increasingly niche ETFs specialize in certain sectors, areas, and securities that can help balance out your other investments.

• Broad index-based ETFs: These are intended to track popular indexes like the S&P 500 stock index, which offers a certain taste of the general US stock market.
• Sector or niche ETFs: These ETFs can track a more narrow part of the market as either a speculative bet on a certain market segment or as a way to diversify an existing group of securities. These types of ETFs can represent unique market segments like commodities (e.g., gold, oil) or they can specialize in a narrower segment of a larger class of assets (e.g., small companies, foreign companies, or cybersecurity companies).
• Bond ETF: Used to provide regular income to investors, and distribution depends on the performance of underlying bonds.
• Stock ETF: A basket of stocks that track a single industry or sector like automotive or foreign stocks.
• Industry or sector ETF: Funds that focus on a specific sector or industry, such as an energy sector ETF.
• Commodity ETF: Invest in commodities like crude oil or gold.
• Currency ETF: Track the performance of currency pairs consisting of domestic and foreign currencies.
• Bitcoin ETF: Expose investors to bitcoin's price moves in their regular brokerage accounts.
• Inverse ETF: Earn gains from stock declines by shorting stocks.
• Leveraged ETF: A leveraged ETF seeks to return some multiple (e.g., 2x or 3x) on the return of the underlying investments.

While ETFs may help diversify a portfolio, they aren’t necessarily diverse on their own. Some ETFs provide access to a wide variety of stocks within a specific region, sector, or topic, but not all do. It's important to be aware of exactly what the ETF includes and whether that aligns with your investment goals.

Additionally, the growing popularity of ETFs has resulted in a surge of funds tracking various indices or industries, leading to amplified market volatility due to algorithm-driven investments by some of the funds.

ETFs can be purchased on most online investing platforms, retirement account provider sites, and investing apps like Robinhood, often with commission-free trading.

Choosing an ETF

When choosing an ETF, it's important to understand the different types available and how they can align with your investment goals. Here are some key considerations to keep in mind when selecting an ETF on Robinhood:

Investment Focus

ETFs can vary in their investment focus, allowing you to invest in specific industries (such as automotive or technology), regions (like European markets or emerging markets), or other categories of securities. Consider your area of interest and the level of risk you are comfortable with. For example, if you believe that cybersecurity is a smart investment but are unsure about which individual company to choose, a cybersecurity ETF can provide exposure to a variety of companies in that industry.

Broad Index-Based ETFs vs. Sector or Niche ETFs

Broad index-based ETFs track popular indexes like the S&P 500, offering a taste of the general stock market and larger companies. On the other hand, sector or niche ETFs focus on a narrower part of the market, such as commodities (gold, oil) or specific types of companies (small businesses, foreign companies). Sector or niche ETFs can be used as a speculative bet on a particular market segment or to diversify your existing portfolio. However, they may expose you to additional political, currency, and market risks.

Diversification

While ETFs can help diversify your portfolio, it's important to remember that not all ETFs are inherently diverse. Review the holdings of the ETF you're considering to ensure that it aligns with your diversification goals.

Tradeability

Although ETFs can be traded throughout the day, like stocks, some ETFs that focus on niche sectors may have fewer buyers and sellers, making it challenging to trade your shares quickly at your desired price.

Leverage and Volatility

Some ETFs are designed to amplify market moves, potentially resulting in higher gains but also more significant losses. These leveraged or inverse ETFs are generally used by short-term traders and carry higher risks.

Fees and Expenses

Consider the expense ratios and management fees associated with the ETF. While ETFs typically have lower fees than actively managed mutual funds, the fees can vary, and they will impact your overall returns.

When choosing an ETF, it's crucial to conduct thorough research and carefully evaluate your investment objectives, risk tolerance, and time horizon. Diversification and understanding the specific holdings of an ETF can help mitigate some risks, but investing always carries a level of uncertainty.

Opening a Robinhood account

To get started with Robinhood, you'll need to sign up, get approved, and link your bank account. The cash value of any stock rewards you receive cannot be withdrawn for 30 days after the reward is claimed, and they will expire if not claimed within 60 days.

Robinhood offers a range of investment options, including stocks, ETFs, options, and cryptocurrencies. It provides access to approximately 500 ETFs, giving you the opportunity to diversify your portfolio and invest in a variety of sectors, industries, or regions.

Keep in mind that investing carries risks, and it's important to do your research before making any investment decisions.

Funding your account

To start investing in an ETF on Robinhood, you'll first need to fund your account. Here's a step-by-step guide:

• Sign up for a Robinhood account: If you don't already have one, you'll need to create an account on the Robinhood website or mobile app. Provide the required personal information and agree to their terms and conditions.
• Get approved: Robinhood will review your application and run a background check. This process usually takes a few business days.
• Link your bank account: Once approved, link your bank account to your Robinhood account. You can do this by providing your bank account and routing numbers.
• Fund your account: Transfer money from your bank account to your Robinhood account. There may be a waiting period before you can use the funds, typically around 3-5 business days.
• Choose an ETF: With your account funded, you can now choose an ETF to invest in. Robinhood offers a wide range of ETFs, including those that track indices like the S&P 500 or focus on specific sectors or industries.
• Place your order: After selecting the ETF you want to invest in, place your buy order on the Robinhood platform. Specify the amount you want to invest, and Robinhood will handle the purchase for you.
• Monitor your investment: Once you've made your investment, you can track its performance on the Robinhood platform. Remember that investing carries risks, and the value of your investment can go up or down.
• Consider diversification: To manage risk, consider diversifying your portfolio by investing in multiple ETFs across different sectors or industries. This can help spread out potential losses and increase your exposure to different areas of the market.

Remember to do your research before investing and understand the risks and costs associated with any investment product.

Making your first ETF purchase

Step 1: Understanding ETFs

Firstly, it's important to understand what an Exchange-Traded Fund (ETF) is and how it works. ETFs are like investment "smoothies", allowing you to invest in a mixture of different stocks or securities at the same time. They are similar to mutual funds but trade on exchanges like stocks. ETFs can be bought and sold during regular trading hours through a broker or a brokerage app, making them highly liquid assets.

Step 2: Choosing an ETF

When choosing an ETF, consider your investment goals and risk tolerance. ETFs can be tailored to specific industries, sectors, or regions, or they can track a broader market index like the S&P 500. For example, you could invest in an ETF focused on cybersecurity, real estate, or the S&P 500.

Step 3: Opening an Account with Robinhood

To start investing in ETFs on Robinhood, you'll need to open an account. Robinhood offers a simple and user-friendly platform that is accessible through its app or website. There are no account minimums, and the sign-up process is straightforward.

Step 4: Placing Your First Trade

Once your account is set up, you can start investing in ETFs. Robinhood offers a range of ETFs to choose from, and you can place trades directly through the platform. Remember to do your research before investing and only invest what you can afford to lose.

Step 5: Monitoring and Adjusting Your Portfolio

After making your first ETF purchase, it's important to monitor your investments regularly. Review your portfolio's performance and make adjustments as needed to align with your investment goals. Remember that investing carries risks, and the value of your investments can go up or down.

By following these steps, you can make your first ETF purchase on Robinhood and start building your investment portfolio. Remember to do your own research, understand the risks involved, and invest wisely.

Frequently asked questions