Leveraging capital in the stock market using Robinhood Gold

The mobile app brokerage Robinhood (I am not affiliated) recently released Gold which allows you to borrow capital to invest into the market. This type of loan in finance is traditionally called margin.

Note: Use of Robinhood Gold buying power is considered high risk and not suitable for all investors. Make sure you understand your margin maintenance requirement and the implications of a margin call. See the official Robinhood margin disclosure statement for complete details.

Robinhood Gold is different than traditional margin. Instead of charging a fixed percent interest (this is how nearly all brokerages do it), Robinhood is charging a flat monthly fee for lumps of additional capital.

Monthly Fee Additional Buying Power
$10.00 / mo $2,000
$15.00 / mo $3,000
$25.00 / mo $6,000
$40.00 / mo $8,000
$50.00 / mo $12,000

Let’s break down the annual fee and fee percentage of each lump of capital:

Annual Fee Additional Buying Power Annual Fee Percent
$120.00 / yr $2,000 6%
$180.00 / yr $3,000 6%
$300.00 / yr $6,000 5%
$480.00 / yr $8,000 6%
$600.00 / yr $12,000 5%

So essentially Robinhood is offering capital at an average of 6% annual fee, excluding the value at their $25 and $50 a month levels borrowing $6,000 and $12,000. The question then becomes, can you invest that additional capital and get annual gains greater than 6%? While I am sure professionals in finance may have some clever instruments (perhaps bonds, currency, commodities) I’m going to cover two simple strategies.

 Strategy I. ETFs

Exchange-traded funds typically track an index such as the S&P 500 or Nasdaq Composite. My personal favorite ETFs are the tried-and-true SPY and QQQ.

Let’s look at the price returns for the last 10 years of both ETFs.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (as of 6/8/17)
SPY 5.14% -36.81% 26.37% 15.06% 1.89% 15.99% 32.31% 13.46% 1.25% 12.00% 8.48%
QQQ 19.02% -41.73% 54.70% 19.91% 3.38% 18.12% 36.63% 19.18% 9.45% 7.10% 19.50%

I personally prefer QQQ because it tends to offer larger annual returns over SPY but with a greater risk in potential downside. For example, In the 2008 crash QQQ lost 41.73% where as SPY lost 36.81%.

 Strategy II. High to medium dividend paying securities

Dividend paying stocks essentially pay you cash every quarter that you hold a security. You can use dividend screeners such as Nasdaq dividend stocks or Dividend.com to find securities. Annual dividend returns range from over 20% (typically extremely volatile and high risk) to less than 1%.

Note: The ETFs from above, SPY and QQQ pay a dividend (as of 6/8/17) of 1.86% and 0.84% respectively.

 Conclusion

At a 6% annual fee, Robinhood Gold costs less for capital than the average 8.25% margin rate of nearly all other online brokerages. With all that said, I am going to signup for Gold and add buying power into my account to leverage an existing security that I already own. The security I picked has solid price growth potential and currently yields a 4.72% dividend offering a nice balance.

 Full Disclosure

As of 3/12/2017 I am no longer using Robinhood Gold or margin.

 
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