With 22.4 million users as of 2021, Robinhood has become an incredibly popular investing platform over the last several years.
The company’s zero-fee approach to investing has made it a staple of the retail investing world, especially where young investors are concerned.
One of the most common questions people have about Robinhood, though, is whether the platform is aimed only at stock traders. Specifically, can you buy index funds on Robinhood?
Are Index Funds Right for You?
Before looking for them on Robinhood, you first need to decide whether index funds are a good fit for your portfolio.
For almost all investors, index funds are good investment options. These funds offer automatic diversification at low costs, making them excellent options for new investors and experts alike. Because they track large indices, index funds also carry less risk than individual stocks.
Index funds are especially useful if you’re saving for retirement. The combination of good long-term performance and less emotional attachment to individual investments makes index funds ideal instruments to hold for years or decades.
Over that time, they can produce impressive gains and give you plenty of money to fund your retirement. For new investors looking to build wealth for retirement, index funds are likely the best options in today’s market.
Does Robinhood Carry Index Funds?
Robinhood carries a variety of index funds that trade as ETFs. Users can buy or sell shares of these funds at any point during regular trading hours.
Among other funds, Robinhood users can choose from index funds offered by Vanguard, SPDR and iShares. You will find both domestic and international index funds available on Robinhood.
If you’re bullish on future Chinese growth, for instance, you can buy the iShares China Large-Cap ETF (FXI). Exploring the variety of index fund ETFs available on Robinhood will take some time, but you’ll also be introduced to a wide range of investment opportunities.
Can You Buy the S&P Index on Robinhood?
On Robinhood, you will find several funds that allow you to buy the popular S&P 500 index of large-cap American companies. Because Robinhood doesn’t charge commissions, the only cost to buying S&P 500 ETFs on the platform is the ordinary management fee charged by the fund itself and perhaps some minor fees (not imposed by Robinhood).
The S&P 500 is a benchmark index fund for many investors. Over time, the index has been one of the best assets to hold for stable growth.
Stock-picking legend Warren Buffett has recommended S&P 500 index funds and even plans for them to make up 90 percent of his wife’s investment portfolio after his death.
Historically, the index has returned an annual average of about 10.5 percent.
Can You Buy ETFs on Robinhood?
Robinhood offers a massive variety of ETFs, including several index funds. Popular ETFs listed on Robinhood include:
- Vanguard Total Market ETF (VTI),
- SPDR Dow Jones Industrial Average ETF (DIA) and
- Global X DAX Germany ETF (DAX).
Beyond index funds, Robinhood hosts many other types of ETFs. International funds, industry-specific funds and even commodity and real estate funds can all be found on Robinhood. Whatever assets or markets you are interested in, there’s likely a fund for doing so available on Robinhood. In many cases, multiple funds tracking the same assets in different ways are even available.
It should be noted that some of the ETFs Robinhood offers are quite complex instruments that need to be fully understood before buying.
For example, Robinhood lets investors buy shares of the ProShares UltraShort QQQ fund (QID). This ETF is an inverse fund that uses leveraged derivatives to bet against large-cap companies in the NASDAQ 100. Because of this, buying this fund can produce heavy losses when those companies do well.
Be cautious when selecting your ETFs, and always be sure to fully understand the assets you’re buying before opening investment positions.
Why Buy ETFs vs Stocks
ETFs offer a variety of advantages over individual stocks. They carry somewhat less risk due to their inherent diversification.
Like individual stocks, ETFs can also be selected for specific characteristics. A high-dividend ETF, for instance, will provide a stable source of income from several stocks that offer high yields. An ETF focused on growth stocks, by contrast, may not produce much in terms of dividends but will appreciate in value more quickly.
ETFs also have the advantage of being largely passive investments. If you buy a fund that you plan to hold for the long term, you can substantially reduce the work that goes into managing your investments. While you should still check performance periodically, managing a portfolio made up of a few funds is far simpler than trying to juggle a large basket of individual stocks.
Pros of Buying ETFs
There are a variety of reasons to buy ETFs. If you want to own shares of index funds, for instance, an index fund ETF is an easy instrument to buy from your existing brokerage account. Their low fees also make them attractive, especially on no-commission platforms like Robinhood.
ETFs can also help you invest in specific industries or niches. For instance, a recent introduction to the ETF market is the Lithium & Battery Tech ETF (LIT). This fund invests in lithium and battery companies in an attempt to target the emerging electric vehicle market.
ETFs like this one allow investors to profit from new technologies and market developments without the difficulty of picking individual stocks as winners or losers. It should be noted, though, that this kind of market-specific fund carries higher risks than those that only track large stock indices.
Why Buy Stocks vs ETFs
The main advantage of buying individual stocks is that you have complete control over the makeup of your portfolio. Because ETFs are made up of several different assets and their composition can change over time, investors have less control over them. When you buy individual stocks, you’re in control over the assets and their proportions within your portfolio.
Individual stocks also help investors avoid ongoing management fees. Even very low-cost index funds charge some fees based on the amount of money you have invested. Individual stocks, by contrast, have no fees. On platforms such as Robinhood that don’t charge trading fees, this fact makes individual stocks truly cost-free.
Finally, although they do carry higher risks, individual stocks also offer investors the opportunity to beat the market. In 2021, for example, the top 25 individual stocks all finished with gains of 90 percent or more.
The overall S&P 500 rose by 26.9 percent in the same period, an unusually strong gain by historical standards. Taking advantage of the gains in individual stocks carries heavy risks but can also produce outsized returns.
How to Buy Index Funds in a Brokerage Account
If you already have a brokerage account with Robinhood or a similar broker, the process for buying index funds is very simple.
The first step is to decide on the index you want to buy. Different indices will perform differently over time and may offer more or less in terms of cash flow from dividends. The right indices for your portfolio will depend on your risk tolerance and overall investment goals.
Next, select the individual funds you plan to purchase. Compare fee structures and weighting, as different funds may track the index in slightly different ways. As with all other investments, be sure to fully understand how a fund works before you buy it.
Finally, you can buy shares of the fund just as you would any individual stock. Deposit the necessary amount of money into your account, then place an order for your desired number of shares. Once your order executes, you will have shares in your chosen index fund.
Can You Buy Index Funds on Robinhood: The Bottom Line
Robinhood offers a variety of index funds that trade as ETFs. If you’re interested in index fund investing, Robinhood is a good way to keep your costs low. In addition, you can find a variety of other ETFs that will let you build your portfolio.
Robinhood also has the advantage of being a zero-cost brokerage for individual stocks. Many investors prefer to have a blend of individual stocks and diversified funds in their portfolios. With Robinhood, you can meet both of these needs on the same platform at an attractive price point.
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