A few years ago, in the quest to increase my net worth and start increasing my passive income, a friend mentioned the online trading platform, eToro (affiliate link). I was intrigued and looked into a bit more. On paper it seemed to tick all the boxes and plus being in Australia, it gave me access to several oversea exchanges without having to pay significant brokerage fees each time.
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67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Note that this does not apply to US Users and eToro USA LLC does not offer CFDs.
I’m going to break down how you can use eToro to your advantage and how it compares against other traditional investing ideas.
This blog post will cover
- What is eToro?
- Should you use it?
- eToro vs managed funds
- Comparison of eToro portfolio vs brokerage portfolio
- Using eToro to your advantage?
- Succeeding with eToro
What is eToro and should you use it?
eToro is the popular global marketplace for people to trade currencies, commodities, indices and CFD (Contract for Difference) stocks online in a relatively simple way.
It focuses on the social aspect of trading – here you’re able to see other people’s trades, talk on the forums and let people know your thoughts. It’s like a combination of Facebook, Twitter and a brokerage account all in one. The only way you can’t see someone’s trades is if they have a private profile. Those with a private profile can’t be part of the Copy Trading program, so it’s a catch-22. Sometimes it’s good and then there are other times where people spew their thoughts without much thought as to what they’re actually saying.
Lots of users
So think of it as a social platform that you can trade on. There are approximately 9 million+ users of the platform. With the recent rollout to the USA (cryptocurrencies only), this number is expected to grow over the years. So having 9 million opinions can be a good thing if you have the time.
A lot of traders use leverages for their trading but I would advise against this whilst you’re learning how to trade. Also, depending on where you are located, you might be restricted to CFD trading.
They predominantly have US stocks but also have access to the English, Italian, French, Chinese, Swedish and Norwegian stock markets. They aim to continue increases the markets within each of these exchanges as time goes past. There are also significant forex, indices, ETFs, commodities and cryptocurrency markets available to traders.
Why should I use it?
Easy. It’s simple, social and accessible.
Since it started 2007, eToro has consistently taken measures so that its platform makes online trading easier and investing becomes accessible to anyone. By keeping a balance between giving easy access to beginners and improving upon important elements for more experienced traders, eToro has always impressed me.
eToro offers both short-term options for day traders and long-term options for investors. This appealed to the buy and holder inside me. An interesting offer is copyportfolios. These act like a managed find in which in invest in within eToro. This means that you can pick certain portfolios that mimic some of the best funds in the world (think Carl Icahn, Warren Buffet, Yield King, Altia Investment). Or choose a portfolio that focuses on a particular market strategy (Driverless cars, 5G, Cybersecurity and many others). They also offer a portfolio that follows traders that have met certain criteria. Consistent growth, active traders, predicted growth – and many more.
Social
eToro takes great pride in their social trading features, enabling its clients to benefit from the collective wisdom of its vast network of traders. Their social newsfeed, CopyTrader system, and Popular Investor program utilise the full potential of our next-generation social trading platform. With numerous successful traders using our platform to share their strategies, you have everything they need to pursue their financial goals.
Accessible
It’s accessible from a trader’s point of view. eToro has over a dozen exchanges, forex, cryptocurrencies, indices etc all available to anyone who is able to trade online. This means that someone in Australia can trade US Stocks, Swedish stocks, and other exchanges without having to pay exorbitant brokerage fees to place the trade each time they want to trade.
Should you choose eToro over managed funds?
Unfortunately, there is not a simple answer to this. There are too many factors that come into play for the investor. Each investor is different and has different risk tolerances. There are many similarities between the two and also, many differences.
With eToro, you can use it as a normal brokerage, buying/shorting shares in particular stocks, or invest in indices or ETFs. One thing I have noticed is that it combines this and much more into one platform. You can also copytrade (where you mimic other traders), copyportfolios (where you can invest in a particular sector or category), invest in cryptocurrencies, forex, and commodities. For this example, let’s look at copyportfolio as it’s the closest to a managed funds on the platform.
You’ll run into the same issues with eToro and Managed Funds, where you provide the money and they do the trading for you. You have little to no control over what trades they make, when they execute them and why they executed them. For a trader like myself, I don’t like putting my hands into a managed fund like that. My only exception would be a fund that tracks one of the major indices, rather than a particular sector or technology.
Leverage your investment
With eToro, you are able to leverage your investment in a copyportfolio, which I would advise against. Leveraging takes $x out of your account on the basis of your ‘borrowing’ money from eToro to have a bigger holding. To me, the whole aim of the game is to not give money away and leveraging is the easiest way to do this. You can leverage a copyportfolio and it shoots up in a week, netting you a nice 20% profit but it could also dive then the next day, leaving you with nothing. If the average trader knew how the market was going to react, then we’d all be very wealthy!
If we look at ETFs and LICs on the Australian Stock Exchange (ASX) and compare them to eToro, these are some of the key findings.
- There are no ASX ETFs/LICs listed on eToro
- The only ETFs are American or English (UK)
- SPY, QQQ, VOO etc
- ETFs/LICs on the ASX comes with a management fee
- VAS, AFI etc
- ETFs on eToro does not attract a management fee but
- They do have a spread at purchase
- They have a reduced dividend payment
- No Dividend Reinvestment Plan
Depending on what you’re after in your trading journey, both eToro and Managed Funds have good and bad points. If I was investing long term (15+ years) I would choose a managed fund purely for the higher dividend payment and DRIP. That way, I can set and forget for years to come. With eToro, I could easily diversify my account with the dividend payments, looking at other areas or reinvest back into it. This would be within a shorter time period (say less than 6 years)
So it is hard to tell what the more suitable product is as it will depend on your goals, tolerance and investing style.
Comparison of my eToro portfolio vs Others
In this section, I’m going to look at an eToro trading portfolio (my own portfolio) vs other portfolios and managed funds.
In this instance, I’m just going to look at portfolio growth without considering dividend reinvesting plans. Mainly because each trader is different, and they do different things with their dividends. Some reinvest into the same stocks, some use the cash dividend as a salary substitution, others invest in other stocks.
One of the all-time benchmarks for good portfolio growth are indices – specifically the SP500. If you’re unable to beat the market, then you may need to re-evaluate your strategy. You could invest in an ETF that tracks an index and let it run. In the screenshot below, I’ve compared my eToro portfolio to the SP500 and the AUS200 (AXJO). I chose the timeframe of two years because that is when I started trading on eToro. One thing to consider is that this is just 2 years of investing. The next two years could be totally different. Only time will be the deciding factor. A general rule of thumb is that the earlier and longer you can invest, the better off you will be.
Results
From 18 October 2016 – 18 October 2019 the results were
- eToro Portfolio – 27.92% (13.96% per year)
- SP500 – 26.42% (13.21% per year)
- AUS200 – 17.01% (8.50% per year)
I only just pipped the SP500 which is a good result over 2 years. A key observation is that my portfolio was more diverse in comparison to the SP500. My portfolio over the two years comprised of stocks from USA, England, China and Italy, plus Forex pairs, cryptocurrency, ETFs, commodities, and other world indices. Looking at the graph, you can see that my portfolio mimics the SP500 quite closely in its trajectory over the years.
When we look at two of the more popular ETF/LIC in Australia – VAS and AFI respectively – you can see that their growth over the last two years was 12.39% and 11.65%, without considering the DRIP option. For two holdings that mimic the AUS200, they should have been closer to the 17.01% mark for the two years.
An important factor as well is fees. There are no management fees in eToro unless you leverage a holding. So you could set and forget for years without it eating into your profits, whilst if you went through your broker and put your money into a managed fund, you need to consider fees. The fees can add up very quickly and eat into your profits.
How you can use eToro to your advantage?
Besides the obvious method of buying an index tracking ETF and letting it run, there are other ways that you could use eToro to your advantage. One of the key things that set eToro apart from other online trading platforms, is the CopyTrader option. There are over 9 million traders on eToro, many of them spend many more hours reviewing charts and signals – and you can leverage that.
CopyTrading is allocating a portion of your funds to copy what another trader is doing. If the trader buys $GOOG stock, then the relative portion of your copy funds will buy $GOOG stock. You’re basically trusting the trader enough to copy their trades automatically. It is important to note that none of your money actually goes to the trader. Their trades are replicated within your copy trader funds.
They are essentially acting like a Funds Manager – and like in the real world, when they get to a certain level, the Funds manager will get a kickback from eToro based on the Assets Under Management (AUM) – via the Popular Investor Program. It doesn’t actually cost money to use the eToro CopyTrader feature – although there is a caveat. If the trader you are copying, uses leverage for their trades, the fees associated with that trade will come out of the equity you have with them and affect your profit/loss. As an example, the trader you are copying has a profit of $100 but there are $7 in fees, then your profit is only $93. These are normally associated with leverage fees.
Focus on a sector
Out of all the traders, you can choose different ones that focus on a particular market. There are traders that deal exclusively in Forex, or commodities, or stocks or indices – you could spread your funds across these traders to minimise your risk against the market. As an example, if you copied my portfolio two years ago with $10,000 and did nothing. You would have at least $12,972 – this doesn’t consider the returns you would have received from the stocks in my portfolio that attract a dividend. Thankfully, eToro has some great filters you can utilise to find the perfect trader to suit your trading style. Although I don’t copy anyone in my portfolio, I do hold a competition of traders to see how can return the best growth over a period of time.
When finding a trader, I use the following filters:
- Time Period = the trader should have been trading for at least the last 12 Months. This reduces the number of maverick traders that fluctuate the portfolio wildly in their first few months
- Country = Anywhere – location shouldn’t matter.
- Copiers = the number of copiers a trader has shouldn’t matter.
- Copy Assets Under Management (AUM) = this figure doesn’t matter as they could have 2 people investing $50,000 each or just 50 people investing $1,000.
- Return = You should expect a greater than 10% return for the last 12 months. A good benchmark would see what the SP500 has returned in the last 12 months.
- Profitable Months = >50% to show they are winning most months in their trading
- Profitable trades = this shouldn’t matter because I believe that the data isn’t reflected properly. The trader could have 9 x 1% winning traders but lose 75% on just a single trade. It will show that they have a 90% profitable trade rate. Plus you wouldn’t know what the $ amounts per trade are.
- Risk Score = 1-5 This range is means that the trader isn’t taking too many risks nor are they leveraging their trades too highly, which will affect their risk score.
- Daily Drawdown = <5% this means that most of their portfolio value has dropped in one day is less than 5%.
- Weekly drawdown = <10% as above but with their weekly portfolio change.
- Allocation = this is up to you but there are certain markets that I don’t feel comfortable the CopyTrader trading in. For some it is cryptocurrency or Forex – you can choose. You can also flip the filter and specify someone that only deals in a certain market. You will have to note that this only looks at their current portfolio. So you will have to check now and then that they don’t stray. One thing to combine with this is their trading history (available via their portfolio page) which will give you a good insight into their history.
- Average Trade size – traders should not be using more than 5% of their equity per trade. To me, this reduces the risk of a trader having too much in one holding and their portfolio tanking after a bad day.
Using these points above, you can find the perfect trader to suit your trading style.
Succeeding with eToro
Whilst you can certainly grow your portfolio through traditional methods of trading on eToro, one of their incentives to attract good traders is the Popular Investor Program.
When someone chooses to copy you, you can apply to become a Popular Investor. There are 4 levels of Popular Investors:
- Cadet
- Rising Star
- Champion
- Elite
Levels 2-4 offer financial incentives to reach and maintain that level. Each level has various criteria you must meet in order to progress to that level (and the next). Understandably, the higher up you go, the harder it is to meet the criteria, but the incentives are worth it.
For Rising Star Popular Investors, they receive $500 USD per month they meet the criteria. Champions, they receive $1,000 USD per month.
For Elite, they receive $1,000 USD plus 2% of their annual assets under management per month. Assets under management are the funds all of their copiers have allocated to them. So, if 200 people have allocated $1,000 each, that means they have $200,000 AUM. Back in 2017, there was a trader that had $36 million AUM and he was an Elite Popular Investor.
That means he received $1,000 plus a portion of the annual AUM. 2% of $36million is $720,000. Then that would break down to $60,000 per month! Not bad for a bit of online trading! So if you manage to get a following of copy traders, build up your AUM, you can easily get an incentive for doing your normal trading. One good thing is that if your portfolio grows, so does the copy of your traders. So the more money you’re making, the more money you make for your copiers, which will, in turn, make more money for you!
If you’re interested in joining eToro becoming a Popular Investor, these are the criteria you need to meet.
If you ever want to learn more about eToro, you can check out my eToro Portfolio, hit up my Twitter, or Instagram
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