December 17, 2018: Robinhood’s ‘Revolution’ Or Gimmick

Dec 18, 2018 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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Robinhood’s ‘Revolution’ Or Gimmick

Online brokerage Robinhood made a headline last week by announcing that it now offers checking and savings accounts that pay 3% annual interest to its customers. However, amid criticism from regulators and peers, it quickly backtracked and now states that it’s planning to ‘rebrand’ & relaunch the program. 

Unfortunately (or fortunately for Robinhood), it was reported that this news alone has attracted over 600k new user signups.

At issue is that regulators are pointing out that this is not a conventional checking and savings offering from a real bank that has FDIC (Federal Deposit Insurance Corporation) insurance of up to $250,000 cash amount. This is simply a brokerage account that has insurance from SIPC (Securities Investor Protection Corporation). SIPC is an industry formed consortium while FDIC is from the federal government. The cash in a brokerage account, by definition, can be used for some purpose (such as lent out) by the broker. This means it’s less safer than a checking/savings account offered by a bank. 

So in theory, cash in a brokerage account is not as safe as that in a bank albeit the extra risk is extremely small. 

What actually surprised us more is the 3% annual interest from the announcement, considering currently, the best annual interests from Treasury Bills and brokered CDs (data are from Treasury, Vanguard and Fidelity):

  1mo 3mo 6mo 9mo 1yr 2yr
CDs (New Issues)  2.25% 2.45% 2.55% 2.60% 2.75% 3.10%
U.S. Treasury 2.32% 2.44% 2.56% 2.64% 2.67% 2.69%

So unless Robinhood takes excessive risk on its customer cash, it will for sure lose money from this program. So this offering is not sustainable for long. 

The only plausible explanation from this is that it’s a marketing gimmick that will first serve as a loss leader to attract new customers and after a while, it will revert back to much lower interests. Since brokerage/bank accounts are usually sticky, meaning it’s too much hassle for people to move to other banks or brokerages, Robinhood wins. Talk about ‘reversing’ Robin Hood!

The ‘honest’ cash interest

Robinhood’s program is not the first one that a financial institution tries to pull in order to lock in new customers. One can find many incentives online that offer higher cash interests than major banks. But unfortunately many of them (not necessarily all of them) will revert back to some much lower rates later on so that they can make profit. Granted, it’s still unbelievable that major banks still offer meager interests. But going to another extreme to offer unsustainable rates is alarming and not trustworthy. 

We have discussed many times on how to maximize cash return without incurring much risk. For example, an easy way is to invest in a low cost money market mutual fund such as Vanguard’s prime money market fund that currently yields 2.34% or a safer one Vanguard’s Treasury money market fund that has 2.24% yield. These money market funds are extremely safe (though no FDIC/SIPC insurance). In fact, the Treasury money market fund only holds Treasury bills that are considered the safest and most liquid. 

If you still have doubt on money market funds from a brokerage, you can construct your own ‘Treasury money market’ that only invests in Treasury bills, assuming you can manage your cash need and are willing to spend efforts. You can open an account on TreasuryDirect.gov and purchase 1 month, 3 month, … Treasury bills without paying commission. You can do so weekly, for example, purchasing 1 month TBill every week. Doing so, you will have a ladder (or pipeline) of TBills that will expire every week. To be more flexible, you can even buy/sell Treasuries from a brokerage account. In a secondary Treasury bill market place, you can even purchase weekly expired TBills that can still offer much higher (as high as 2%) interests. What’s more, if necessary, you can sell your TBill holdings to the secondary market to raise the unexpected cash need. 

The ‘do-it-yourself’ approach in the above is certainly not for many. However, doing some exercise like this will give you knowledge to understand where and how to get some ‘honest’ cash return safely and see whether a promotion is a gimmick or not.  

Market overview

All risk assets (other than gold) are now decisively in a down trend:

Major asset trend as of 12/17/2018:

Description Symbol 1 Week 4 Weeks  13 Weeks 52 Weeks Trend Score
Intermediate Treasuries IEF -0.02% 1.76% 1.94% -0.65% 1.04%
Mortgage Back Bonds MBB -0.02% 1.28% 1.11% -0.08% 0.75%
Treasury Bills SHV 0.05% 0.18% 0.53% 1.7% 0.7%
Total US Bonds BND 0.27% 1.34% 0.86% -0.71% 0.62%
Gold GLD 0.16% 1.9% 3.75% -1.55% 0.32%
US High Yield Bonds JNK -0.29% -0.25% -3.23% -1.3% -1.36%
International REITs RWX -0.54% -1.32% -4.48% -6.59% -3.68%
US Equity REITs VNQ -4.94% -4.13% -5.69% -4.94% -4.02%
Emerging Market Stks VWO 0.31% -2.07% -4.18% -12.59% -5.86%
Commodities DBC -1.17% -5.27% -11.12% -4.02% -6.78%
US Stocks VTI -3.53% -5.35% -12.34% -4.22% -6.83%
International Developed Stks VEA -0.76% -4.18% -11.12% -13.25% -8.43%

The last survivor, namely US REITs that still had a positive trend score a week ago, is now fully bearish. Thus now, the last remaining US risk assets, US stocks and US REITs, have joined the rest to be in a bearish trend. 

Taking a closer look, the two defensive sectors (out of the three that had positive trend scores a week before), health care and consumer staples, are also in a downtrend: 

US sector trend as of 12/17/2018

Description Symbol 1 Week 4 Weeks  13 Weeks 52 Weeks Trend Score
Utilities XLU -2.79% -0.24% 0.94% 3.54% 2.42%
Healthcare XLV -4.09% -4.05% -6.44% 5.24% -1.27%
Consumer Staples XLP -2.7% -4.88% -3.13% -4.57% -2.09%
Consumer Discretionary XLY -3.6% -3.89% -13.63% 1.75% -6.05%
Telecom IYZ -3.63% -5.06% -10.12% -8.59% -6.1%
Technology XLK -3.5% -3.67% -14.59% -2.01% -7.15%
Industries XLI -3.3% -6.92% -16.62% -11.06% -9.95%
Financial XLF -3.07% -10.38% -14.62% -13.79% -10.87%
Materials XLB -3.09% -7.36% -15.4% -14.82% -11.2%
Energy XLE -3.35% -9.23% -18.04% -10.11% -11.87%

What we can say from the above (and many other tables on 360° Market Overview) is that the current correction is broad base. Investors are abandoning stocks left and right, a typical stage in a bear market. 

Up to now, S&P 500 has retreated more than 13% from its high. If we look at the three major global stock assets this year, we can see that global stocks essentially started to roll over from January this year. 

At the moment, our best guess is that as fundamentals of US company earnings have not materially declined, it will still take time for this to develop into a full blown severe bear market. 

Regardless, following a sound plan and managing risk is the best defense. 

For more detailed asset trend scores, please refer to 360° Market Overview. 

In terms of investments, U.S. stock valuation is still at a historically high level and it might still have a bigger correction. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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