eToro Review: Taking the bull run by the horns

What we think about eToro

Ever since I sat in The Angle pub, next to the Silicone Roundabout opposite where I was a stockbroker (at Walker Cripps Weddle Beck) 15 years ago discussing the merits of eToro as a forex broker, I’ve been fascinated with their journey. I’ve interviewed the founder, the UK MD and watched (despite the industry’s loathing) as they have shrugged off the masquerade of day trading, into becoming a global investment platform sensation. In this review, I’ve tested them year after year and pontificated on what sort of customer should be using them.

In the past, I’ve been very rude about eToro, I didn’t like the way they’d gamified trading and along with Plus 500, they almost made it too easy for inexperienced traders to play the markets.

But are times changing?

Social & Copy Trading

A while ago, we published an interview with the founder of eToro Yoni Assai, about whether or not copy trading could be a challenger to traditional fund management. Copy trading is not new, it’s been around for years, whereby investors will copy the positions of an amateur trader in the hope of making money.

I first came across the concept about 15 years ago, when traders would follow futures traders on Strategy Runner. This of course was for professional regulated advisors to make it easier to have a wider client base and helped with execution allocations. The Strategy Runner technology was later bought by MF Global before its demise. Then came MT4, again, focussing on high-risk markets, like forex and index trading.

But one thing these platforms lacked was a community.

Trading Communities

This is odd because the trading and investing community is one of the most focal out there. There are some hilarious bad pontificators and some very good ones across the entire investment landscape. Seeking Alpha, has some excellent lay contributors looking at stock fundamentals. LSE.co.uk (“London South East” and absolutely no relation to the London Stock Exchange) still have a vibrant community of share chat for UK small-cap stocks. Reddit, has it’s meme’s for pump and dump schemes, and even Saxo Markets, the professional trading platform, tried to introduce a social network for traders called tradingfloor.com where you could link your trading account and see and copy other traders. Covestor tried the concept for stocks in the US, but couldn’t make it work.

One very interesting aspect of eToro’s social trading offering is that they now have a huge amount of data from a broad range of successful investors and traders. They have packed this all together into something they call the GainersQTR smart portfolio which aggregates the investments of the best popular investors on the platform.

But eToro keeps on going from strength to strength. So what is the appeal and why do they have over 20 million users and growing?

Investing for growth

The first thing eToro is keen to point out, when I spoke to the newly appointed UK MD, Dan Moczulski, is that eToro is not a trading platform anymore, they want to be an investing platform. I’ve known Dan for years, he knows the markets and the technology inside out and is well respected within the industry. So I spent an hour with Dan on Zoom, whilst he explained what eToro was all about and where they want to go.

When you execute a trade, unlike other trading platforms where max leverage is automatically given, the default leverage setting on stocks is zero, you can opt for more if you want. However, even though eToro buys the stock in the underlying market, you don’t get voting rights, can’t transfer the stock out, but you do receive your entire dividend entitlement (after it’s been taxed at source). For index and forex trading, though it reverts to form and leverage is set at 20x for indices like the FTSE and 30x for Forex pairs like EURUSD.

Day trading

eToro is not very good for day trading. For a few reaons, the main one being they don’t want to be. My mate Dan, the UK eToro MD told me that they want to be an investing platform rather than a trading platform. He was actually quite put out that we’d included eToro in the trading section, rather than the investing category.

But, whilst I still think there are better options for longer-term investors (although their copy trading track record is doing very well), I don’t think eToro is any good for day trading. There isn’t enough order functionality like, algos, DMA, OCOs, or even limit entry orders. Prices, even though they mimic the bid/offer cannot be tightened up with DMA access. Yes, there is an opportunity to take intra-day positions on indices and forex pairs, but it just doesn’t “feel” like a day trading platform to me.

Brokers like IG, CMC Markets, and City Index are much better for short-term trading. You can compare what we think are the best day trading platforms here, and see how eToro fits in.

Diversfication

But they say, that what they are actually trying to promote is diversification in portfolios by giving new investors the tools to explore the markets. One way they try and do this is through fractional shares and the way people buy stocks. They say they want to give people the opporuntiy to buy lots of little amounts of lots of different stocks (encouraging diversification), If you have £1,000 to invest, you can buy £100 of 10 shares instead of having to figure out how many shares of company A, B & C equates to £100, if at all.

USD account balances

One thing though, that has always irked me about eToro and one of the reasons I’ve classified it as a trading platform rather than investing account is that all trades are settled in USD. In my mind, they fall at the first hurdle as an investment platform, because, how can you have an investing account where you don’t actually own stocks, you can’t invest in an ISA, there are no SIPPs and you are hit with dreaded foreign exchange fees on every trade you make. All those things are key to an investment account.

But, Dan was quite keen to explain why this was the case. It’s a one size fits all solution. If they want to offer free trading, they have to keep things as simple as possible and using USD as a default currency solves two issues.

One, USD is a global currency and most of the trades on the platforms would be settled in USD anyway, even in the UK.

Does zero commission equal zero costs?

The second issue is how they make money when they have zero commission. eToro makes money on foreign exchange (roughly 0.5% per trade) and they make money from withdrawal fees. There are also some stocks that are not zero commission and CFDs are exempt where eToro makes money on the bid/offer spread. Zero commission may be a loss leader of sorts in the UK, as whilst they earn 0.5% in conversion fees, they lose

As an eToro trader you used to be able to offset that FX charge, because if you ought UK shares, you were not charged stamp duty. But eToro has recently announced that they will no longer be absorbing the stamp duty tax. eToro said they absorbed this as part of their simplicity and low-cost model. But unfortunately, that is no longer the case.

Essentially, you get what you pay for and if you want all this for free you have to compromise on something, which is everything being dealt in USD.

20 Million Users

Perhaps, eToro’s most valuable asset is its client base. 20 million users, all with differing opinions and sentiment. Afterall, that’s what makes market. Opinion, it drives buy and it drives sellers. When more people buy the market goes up, and viceversa.

eToro has built a community of almost 20 million accounts, traders or investors. And when you open up the platform it definitely has more of a social media platform instead of a trading platform.

There are two types of community.

The first is the opinion-based, where the feed is populated with the latest views from eToro clients.

The second is copy trading. You can copy anyone you want (as long as their account settings permit it). Or you can copy what eToro call “Popular Investors”, these are investors who have applied to join eToro’s copytrader platform and aim to earn money from it.

Popular investors

Popular investors can earn up to 1.5% of AUC (assets under copy), or however much money other investors on the platform have chosen to allocate to copy their portfolios. However, eToro is keen to point out that once you have $15,000 copying your trades, you are vetted (not endorsed) by eToro and have to stick within risk parameters. Otherwise it would become a scammers paradise.

The thing about investing is that it’s actually quite easy, any fund manager will tell you that the key is to do your research, buy some good stocks, and then do nothing for a very long time. So as long as you do your research and pick some good investors to follow, who are following the same principle then you “should be ok”. BUT, fund managers have oversight, they have compliance officers and risk committees, so they can’t just change their mind about how and what they invest in. Of course, with some notable exceptions, cough, cough Woodford.

When you look at a potential trader to copy, you can see their trading history, their risk parameters and also what they are invested in. Which if nothing else is a good place to start building a portfolio, because you can see where the best performing investors are putting their money. Which is actually a good strategy in the fund management world as well. Morningstar for instance shows the top ten holdings a fund holds. Take a look at Blue Whale for example, you can see what they are invested in and either copy them by buying the fund, or just buy the top ten stocks they hold in your own investment account. If you want to know how fund managers actually invest we have a couple of good interviews with Stephen Yui from Blue Whale and Jamie Ross from Henderson.

If you don’t know which unregulated amateur traders to follow, you have the option to buy a portfolio of aggregated “Popular Investors” diversifying your risk further, or can opt for a smart portfolio that has been put together by a professional investment firm.

Or if you want exposure to sectors there are Thematic funds, like, for instance, if you want to invest in the Metaverse, which is a hot topic right now. eToro have a selection of what they call Smart Portfolios, where they have selected stocks relevant to sectors, a bit like buying ETFs. So if you want to invest in the Metaverse, but don’t know where to start the MetaverseLife Smart Portfolio contains a basket of stocks and crypto that has exposure to the Metaverse.

Cryptocurrency

This brings me quite nicely onto Cryptocurrencies. In the UK Crypto derivatives are banned by the FCA for retail traders. If you want to invest in cryptocurrency in the UK you either have to be classified as a professional trader, or by them on a crypto-exchange or platform like eToro on a fully paid-up basis.

One thing eToro has always been really good at is being first to market with new assets, they offer quite a wide variety of cryptos compared to other regulated fintechs, but also vet which cryptos they add by demand, liquidity, the tech behind them and also overall due diligence. Cryptocurrencies are too big to ignore and accounted for roughly 73% of eToro’s commission during the second half of 2021. So you can’t trade crypto derivatives, but you can invest in them with eToro, you can buy them, sell them and transfer them out to an external wallet with eToro money.

Customer Service

If you are one of the masses, customer service can be a bit of a pain, there is no telephone helpline and the support enquiries that we have made have generally taken a day or so to be responded to.

But with 20 million customers, a great proportion, who are no doubt beginners that is no surprise. If you have enough money on account ($25k upwards), you do get access to a dedicated desk of dealers in Europe and Canary Wharf.

So, who is eToro for?

So if you are a small trader, eToro does offer a very innovative way to access the financial markets. It’s quite jolly on the social media feed on the platform, and it is what it is. This is what people want, obviously, as they have 20 million customers. The largest incumbents still have only hundreds of thousands in the UK and in the US a few million.

The key difference between investing in trading, is that investing is a long-term thing, trading is speculation for short-term profits.

However, even though eToro may be positioning itself as an investment platform rather than a trading platform, I’d still consider the investments on offer to be high risk, for your fun money.

I genuinely enjoyed playing with the platform and testing what was on offer. It’s game-changing, but I still think they have a long way to go before you’d allocate more than a small percentage of your overall investment portfolio with them. Your longer-term investments are in my view better off with a boring investment platform like Hargreaves Lansdown or Interactive Investors. But, it will be interesting to see how eToro matures over the years, along with their customer base.