Can Robinhood users actually call themselves Robin Hoods, or is it just another tool for the rich to rob the average Joe? In this series we delve deeply into Robinhood's public data to gain insight into user activity. Welcome to the second part, where we combine Robinhood data with other public sources to quantify the risk Robinhood users are experiencing, especially in terms of the apparent (or insufficient) diversification of their portfolios.
In the Beginning In November, we downloaded the full Robintrack database, which shows how many Robinhood users have a given population over a given period of time. Although public data does not include the total share purchase volume, it still provides us with a wealth of information, especially in combination with other readily available data on these listed companies.
Risk Assessment Throughout Robinhood's platform we need to look at how diversified the holdings are. Now there are different types of diversification. We will look at some of them:
- Diversification across multiple equities / ETFs
- Diversification across sectors
- Diversification across industries
- Diversification via equities against ETFs (Exchange-traded funds, basically baskets with a variety of stocks)
- Diversification by Company Size
- Diversification by Country / Region
Since Robintrack's data does not include all of this additional information, we have summarized it with publicly available data from Yahoo Finance.
Multiple Stock / ETF Diversification
Robinhood currently has approximately 6 million users. According to Robintrack, there are just over 1
Considering only the average number of unique owners per user, the default Robinhood user does not look very diversified.
If we focus on specific stock holdings, excluding ETFs, the distribution of stock levels by sector among Robinhood users looks like this. For comparison, we have added one column for the market capitalization of each sector as a percentage of the S & P 500's total market capitalization.
Consider the Market Capitalization of Each Sector as a Percentage of S & P According to the market capitalization of 500, the information technology sector is actually the largest but not nearly as large percentage of individual holdings among Robinhood users.
To be fair, this inequality could be compounded by the fact that the bonus shares are being issued New clients (and existing ones that recommend new clients) are often those of a technology company like Fitbit or GoPro with a stock price of less than US $ 10 -Dollar.
Consumer Cyclical has other big differences (much more popular with Robinhood). Financial services sectors, consumer defenses, communications services and utilities (much less popular with Robinhood).
The three main sectors among Robinhood users account for 67% of all equity holdings, while the top three sectors are organized by market. Highs are only 41%.
This means that Robinhood appears to be less diversified in relation to the sector than the market in general. Overexposure in a particular sector, in this case Tech, is obviously risk.
Diversification Across Sectors
If we look at sectors that are even more specific than sectors, we see that the following the largest are popular with Robinhood users. We have again added a column for the market capitalization of each industry as a percentage of the S & P 500's total market capitalization.
As you can see, Robinhood users are relatively large in terms of biotechnology and automakers and relatively small in terms of oil and gas. At around $ 9, Ford shares may skew these results as they are usually passed on to new and referring users.
The ten industries most frequently represented among Robinhood users account for 49% of all equity holdings, while the top 10 industries are the most represented by market capitalization, accounting for 45%. Popular industries that are generally not among the most popular shares of Robinhood users are Banks (1) and Insurance (9). Given the confidence (financial crisis) and environmental issues (climate change), it may come as no surprise that these industries are less popular among Robinhood's predominantly millennial target audience. The choice of users is different from the general public and more environmentally conscious and forward-looking.
Stock Selection vs. ETFs
Only 5% of All Unique Robinhood Holdings are ETFs, which account for 640,000 out of a total of 12 million. It is estimated that 8.5% (4 trillion) of total investment in US equity markets relates to ETF investments.
This means that Robinhood users are not invested in certain ETFs that are generally considered to be less risky. Also less diversified in this regard.
Diversification by Company Size
Looking at the size of companies that Robinhood users invest in, the distribution is as follows.
Robinhood users (again in terms of individual holdings) are relatively heavily invested in certain small-cap companies that are generally considered more volatile and risky. Smaller companies typically also have lower stock prices selected more frequently than free stock for new and intermediary users.
Diversification across countries / continents
Since Robinhood users do not trade directly in foreign exchange, but only in al Imitated Number of ADRs (American Depositary Receipts, read the difference between "Foreign Ordinaries" and ADRs) , Diversification by country or region is also automatically limited. So, looking at the data for this particular form of diversification does not make sense, as the lessons learned are not robust enough to draw conclusions.
First of all, it is important to reiterate that freedom is given away. Giveaway shares can distort data so much that we can not state the degree of diversification by industry, industry or company size, although this data is based on the first look not reassuring.
argues that Robinhood is misleading its users (in terms of relatively safe investments) by giving away shares of often smaller companies. Larger stocks (from established companies that are expected to remain viable) and ETFs are generally considered safer investments.
In addition, a large proportion of users seem to stick to the free shares, as it is the average individual stock per user, only two. Therefore, the majority of users are not well diversified when looking at the breadth of their Robinhood portfolio.
If you look only at Robinhood's overall investment portfolio, the (potential) users can definitely benefit from rising awareness about the risks of investing and the strategies they use to reduce those risks, thus lessening the likelihood of the stock market being treated as a casino becomes.
We asked Robinhood for an opinion and received the following response:  Although we are a self-directed broker and offer no investment advice, we provide a variety of human resources: Robinhood Snacks (Newsletter and Podcast), Online Articles (Basic Investing Information) and App Newsfeed (Market News from Outlets like WSJ, CNN, Reuters and Cheddar).