The landscape of investment has been significantly reshaped by the proliferation of the internet, empowering individual investors to participate more actively in financial markets. This shift has led to a notable increase in retail trading volume on Wall Street, with online brokerage platforms specifically tailoring their services to cater to this growing demographic. Among the preferred investment vehicles for these investors are Exchange Traded Funds (ETFs), which offer diversified exposure across various asset classes.
Before the digital age, obtaining timely financial information was a challenge, often limited to physical reports and traditional media. The internet dismantled these barriers, democratizing access to market data and enabling everyday investors to conduct in-depth research on companies and economic trends from their personal devices. This unprecedented access has fueled the rise of the retail investor, making them a formidable force in equity trading.
A recent study, 'The Retail Investor Report,' highlighted that by 2021, retail investors were responsible for nearly a quarter of all equities trading volume on Wall Street, a substantial increase from a decade prior. Online brokers have recognized this growing influence and have adapted their offerings. Robinhood Markets, in particular, has seen considerable success in attracting individual investors through features such as commission-free trading and the option to purchase fractional shares. The platform's '100 Most Popular' leaderboard provides insights into the investment preferences of its users, revealing a notable inclination towards high-growth companies, 'meme stocks,' and, interestingly, a significant number of ETFs.
ETFs are designed to hold a collection of securities, providing investors with immediate diversification based on various criteria, including company size, investment style (growth vs. value), or specific industries. While these funds typically involve a small net expense ratio to cover management and marketing costs, the convenience and diversification benefits they offer are highly appealing. As of a recent September review, three of the top ten most-held securities on Robinhood by retail investors were ETFs, underscoring their widespread adoption.
Among the most favored ETFs on Robinhood are the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust. Both aim to replicate the performance of the S&P 500 index, a benchmark for large-cap U.S. equities. Historical analysis by Crestmont Research indicates that all 106 rolling 20-year periods since the early 20th century have yielded positive annualized total returns for the S&P 500, including dividends. This robust historical performance offers a compelling rationale for retail investors seeking long-term growth and stability. Despite their similar objectives, the Vanguard S&P 500 ETF boasts a significantly lower net expense ratio (0.03%) compared to the SPDR S&P 500 ETF Trust (0.09%), representing a considerable saving for investors over time.
Another prominent ETF on Robinhood is the Vanguard FTSE Developed Markets ETF, which ranks among the top ten most popular holdings. This ETF is designed to track the performance of the FTSE Developed All Cap ex. U.S. Index, offering investors exposure to a broad range of large, mid, and small-cap companies in developed markets outside the United States. Since its inception in July 2007, it has achieved an annualized return of nearly 4%. Its appeal is further enhanced by an extremely low net expense ratio of 0.03%, matching that of the Vanguard S&P 500 ETF. This low fee structure makes it an attractive option for investors looking to diversify internationally at a minimal cost, especially when considering the relatively high valuations of U.S. stocks, as indicated by the S&P 500's Shiller price-to-earnings (P/E) Ratio. The more modest P/E ratio of companies within the Vanguard FTSE Developed Markets ETF suggests a potentially more attractive valuation for international investments in the current market climate.
