Robinhood lessons for ETF issuers
[ETF Pulse appears Mondays and Thursdays. Drew Voros is Editor-in-Chief of ETF.com.]
“At the end of the day, I’m fighting for those who can’t fight for themselves. If that makes me an outlaw, so be it. I have been called worse. – Robin Hood, circa 1400 History of England
Robinhood, the jolly brokerage firm named Nottingham that just went public, is now worth $ 48 billion in Wall Street lunch money. There was no theft, just change on the sidewalk, because Wall Street didn’t want to bend down to pick up the pennies and dimes.
Vladimir Tenev and Baiju Bhatt founded Robinhood in 2013, believing they could recoup the pennies and dimes left by retail investors by offering free commissions and no minimum deposits.
So the very non-Wall Street Dynamic Duo easily made it through the open doors of the castle, bringing in neglected and laid-off retail traders and self-directed investors who don’t consider a financial advisor … until they need to. family tax and inheritance planning on their part. well-researched trades and portfolio management that you can learn at home.
Skip retail at your own risk
The tiny startup in Menlo Park, 3,000 miles from Wall Street, has slowly taken off and made its way onto the radar of retail investors. It was a slow move on those radars in the early years, but suddenly, eight years later, the company went from a Silicon Valley pipe dream to a $ 48 billion brokerage disrupting the gravy train. the old guard, much like ETFs did to mutual funds. .
Robinhood’s success is simply in providing easy and free access to the financial markets for retail investors with no minimum or trading fees, and all the ETFs you want, even cryptocurrencies, because that’s what it is. that people want.
This is something the old guard apparently had no interest in doing, until recently, or until Robinhood came into action in 2013. The idea of free commissions at all levels for investors retail seemed fantastic then, but hardly today.
The dismantling of fixed trading commissions from before 1975 triggered the start of the “race to zero” for trading commissions. But there was no race to zero by the old guard on Wall Street. It felt more like a slow reshuffle, driven mainly by Charles Schwab, which became a brokerage firm 44 years ago, followed by E-Trade and TD Ameritrade.
E-Trade and the likes of TD Ameritrade, which now owns Scottrade, were unfortunately labeled at the time as the new threat to the Wall Street Gravy Train. In reality, these disruptors were bringing a knife to a shootout. Prior to 2000, the commoner could not access the business without paying something, no matter your online skill or access. The Lords of Wall Street always received a pretty sum.
A $ 50 commission for trading online at the time was a good deal. Today is a big road robbery.
Old Wall Street invented order flow payments
Robinhood’s primary source of revenue is the business order flow from Robinhood’s clients. Market makers arbitrate your transaction. Scary? It shouldn’t be. Wall Street invented this – with worse intentions than free commissions. But it has been acceptable, and for the most part understood, a compromise for Robinhood clients for zero commission and tight trading spreads.
And unlike most Wall Street brokerages, Robinhood has been clear as of the day that he gets paid for his trading order flow. The old guard invented the payment stream to improve the flow of income from high commissions and fees for transferring your money to the brokerage house and vice versa. He just kept that income stream buried among the other brokerage skeletons.
Overlooking the trees
One of the strangest wrinkles in the ETF industry – and particularly on the issuer side – is a constant dislike of retail investors. While marketing and focusing on advisers and wealth managers, ETF issuers ignore forest trees.
We hear it from our side of the ETF media sector: “We don’t want retail, just advisers”For online events, which sometimes makes sense, but is still an understatement of much of the growth the ETF industry is currently carrying.
Today, you cannot paint “retail investors” with a single brushstroke. They range in size from children of Robinhood to software engineers at Apple who are self-directed multimillionaire investors from their company’s stocks and 401 (k) they don’t touch.
“I think the heavily indexed or benchmark approach to investing is ripe for change and I think the retail investor, the individual investor, is actually leading the charge,” said Cathie Wood, Founder and CEO of Ark Invest, during the Cboe Exchangeing Perspectives webinar in March and reported by CNBC.
Conformity Jitter Flou Adaptation
We are not outlawing guns because people shoot themselves accidentally or not. Long queues for lottery tickets have never made anyone fear that Americans are wasting some $ 100 billion a year on lottery sales in the United States. Maybe it’s because state governments are selling these tickets.
The fear of compliance and ignorant investors straying into big losses is what I believe is at the heart of why ETF issuers and much of Wall Street restrict marketing, advertising. and, more importantly, product training for blue collar investors.
The unintended consequences of “retail not welcome in our products” is that these investors simply find a place to invest, like Bitcoin, NBA Top Shot, NFT artwork, etc. More and more alternative, non-Wall Street investment products are being created every day.
When fools, big or small, and their money part ways, there is an assumption that something is wrong with the ETF product. This is rarely the case. The products worked well. The investor did not know how to properly use the financial tool and got hurt – advisor, broker or handyman error, more likely.
Awaken the old guard
Robinhood has gone way back in history for its startup name. The Nottingham Forest Disruptors circa 14e century awaken the old guard from its nap.
For ETF issuers, the retail crowd seems like a love or leave thing to do. Many issuers like ARK recognize and seek out retail investors.
And there are plenty of others like ETF Managers Group, with its cannabis ETFMG Alternative Crop ETF (MJ), exceeding $ 1.2 billion in assets under management; Roundhill Investments with its Sports betting ETF and iGaming Roundhill (BETZ) with nearly $ 400 million in assets under management in just over a year; and the dormant ETF hit of 2020, the US Global Jets ETFs (JETS) from US Global Investors, which saw its assets under management grow from $ 40 million in February 2020 to $ 3.2 billion, powered by social media platforms like TikTok and YouTube.
At the very least, retail-averse ETF issuers need to take a closer look at this category of investors. They are smarter than you might think.
Drew Voros can be reached at [email protected]