eToro is offering investors access to capital-guaranteed upside-only social trading when they invest in the firm’s GainersQTR smart portfolio. The benefit of a 100% capital guarantee, which effectively means they can’t lose. For the duration of the investment eToro absorbs any losses made by the GainersQTR smart portfolio, and clients get to keep any profits the fund makes on their investment.
What is the GainersQTR smart portfolio?
The GainersQTR smart portfolio copies the investments made by various traders across the eToro platform.
The decision of which traders and trades to follow is made algorithmically by looking at active, high-quality traders with solid track records. A machine learning program then sifts that list of traders to produce a short list of the very best most consistent traders to follow.
As of its most recent update, the fund had just over 25% of its asset spread among 5 traders.
Over the last year, the fund has returned +12.74% and since its inception in 2015, it has delivered 107.50%.
Perhaps even more impressively, it has a winning month hit rate of 63.33%, a statistically significant edge if it can be maintained.
The fund’s biggest losing month was a -4.91% drawdown in August 2015 its biggest monthly gain came in January 2023 when it returned +9.36%.
What are capital-guaranteed investments?
Capital-guaranteed and upside-only products are nothing new, I helped to structure and sell similar products myself twenty years ago.
In those days I was working for, one of the world’s largest futures and options brokers, on a desk servicing high-net-worth individuals (HNWI) and smaller institutions and banks. We created various products including a capital-guaranteed note linked to the price of gold and others that tracked the performance of Commodity Trading Advisors or CTA’s.
We also created a no-loss single-asset product, that allowed the buyer to pay a fixed upfront premium, to be able to trade, long or short of their chosen asset, for a fixed period of time, of say one month. After which they received their cumulative trading profits, or walked away from any losses incurred.
eToro doesn’t break down the mechanics behind the new capital-guaranteed investment product, and I am not sure how that complies with the FCA’s new consumer duty rules but that is another conversation.
However, reading between the lines, it looks as though it’s based on a strategy of dynamically hedging the portfolio’s underlying exposure, most likely using a derivatives overlay.
Effectively that would mean the more money that the GainersQTR smart portfolio makes for investors in the scheme, the more hedging of its exposure eToro will need to do.
However, if the GainersQTR smart portfolio doesn’t produce positive returns, then eToro doesn’t need to hedge its exposure as much, or perhaps even at all.
What’s the catch?
Well firstly there is a minimum investment amount of $10,000 and then there is a lockup period that extends to 31st December 2024.
Looking at the terms and conditions associated with the product investors can opt-out by unfollowing the traders the GainersQTR smart portfolio is tracking, but doing that will negate the capital guarantee.
The other thing to consider is that by investing in this product you are taking on eToro’s counterparty risk. If you are an existing margin trading client of the broker then you are doing that already.
However for new investors that might be an additional consideration, particularly if you invest a sum larger than the UK FSCS insurance limit of £85,000. The upside limit for individual investments in the capital-guaranteed product is $2.0 million.
If you invest in this product you are effectively buying into the wisdom of the crowds in the belief that the leading traders on the eToro platform can continue their positive track record and if they can’t, that others can take their place.