eToro makes money through commission on trades, widening bid/offer spreads, FX fees when you deposit funds, withdrawal charges and keeping interest on the funds in your account. In this guide, I will explain how eToro makes money in each of those ways and if there are any cheaper alternatives.
How does eToro earn its money?
eToro earns the most money from equities trading which accounted for 48% of the firm’s commission income in 2022, commodity spreads accounted for 27% of the total, cryptocurrencies made up 19% of commissions and FX trading accounted for another 6.0%.
- Related guide: How to make money on eToro.
Here is a breakdown of how eToro earns money from it’s customers:
Commissions and Spreads
According to recent press releases eToro earned $631.0 million of commissions or spreads in 2022, that figure was below 2021’s commission levels but + 5.0% above those seen in 2020.
eToro earns money out of each transaction its clients make in CFDs, cryptocurrencies, equities and other instruments, and it does so through the bid-offer spread, that’s the difference between the price at which you can buy, or sell an asset.
The spreads that eToro charges vary by product, for example, if you trade the US Dollar Index you will 0.004 points of spread, whilst if you trade in the Nasdaq 100 index there is a spread of 2.40 points, and on the Niikei 225 index a spread of 10 points.
Trading in CFDs over stocks and ETFs attracts a spread of 0.15% of the underlying price. Whilst a trade in EURUSD has a spread of 1 pip.
- Related guide: What is a pip in trading?
eToro’s pricing is very good for US stocks as the bid/offer should be the same as the underlying market. However, for UK shares the bid/offer is widened by 0.15%. This is more than most other trading platforms. For instance, IG, Spreadex and CMC Markets charge 0.1%, whilst Interactive Brokers charges 0.02% and Saxo Markets 0.05%.
CFD Overnight Financing
eToro charges CFD overnight financing by adding the relevant interest rate benchmark plus 6.40% per annum. For UK or Sterling-denominated CFDs, the benchmark is the Sonia 1-month index, and for CFDs in US Dollars eToro uses the SOFR l-month benchmark. This is very high compared to other brokers.
eToro is very expensive for holding CFD positions overnight. You can see in our CFD broker comparison tables that eToro charge 6.4% over the standard UK SONIA interest rate. Where as the industry standard from brokers like IG, Pepperstone and Saxo Markets is 2.5%. Interactive Brokers is the cheapest as they only charge 1.5% +/- SONIA.
Foreign exchange fees
FX conversion fees are levied at 0.1% on top of the underlying FX bid-offer spread. eToro also charges 0.5% when you deposit funds on account by converting it to USD from GBP.
eToro is about average for their FX conversion fee. however, the downside is that you can only trade in USD, which means you HAVE to convert your money into dollars. You have notcontrol over it. You also have to convert GBP into USD if you are trading UK stocks. Which is daft, becuase it’s an added expense. it was ok when eToro absorbed your 0.5% stamp duty charge, but you now have to pay that. Which means that if you deposit £1,000 to buy UK shares you will be charged 1%.
All brokers have to charge stamp duty, but you can see on our US stock investing comparison tables that traditional investment platforms like Hargreaves Lansdown and Interactive Investor are more expensive for smaller deals (around 1%) the exchange rate mark-up drops to 0.25% for larger deals.
Interactive Brokers remains the cheapest with an Fx conversion mark-up of online 0.02%.
Growing fees for a growing brokerage
eToro is one of the world’s biggest multi-asset and social trading brokerages, with 33.40 million registered users and 2.80 million funded accounts. The majority of which (73%) are held in the UK and Europe. The firm has some $7.80 billion under administration and operations in more than 100 countries.
eToro is a privately held company and as such it typically doesn’t share financial data with the market.
However, in recent years the firm has been more transparent, initially as it looked to list in New York, via a reverse takeover of a special purpose acquisition company or SPAC.
And then, having shelved that idea, subsequently raising money in the private markets from leading VC investors, who injected $250 million into the business earlier this year.
An investment which valued the business at $3.50 billion.
eToro saw a 17.0% rise in the number of funded accounts in 2022, helped no doubt by its brand recognition and penetration in the UK and Europe. Where, according to survey data from Investments Trends, it is among the most recognised trading platforms.
eToro clients have a median age of 35 years, 95% of them have invested in crypto, and 54% trade more than one asset or product type.
The firm is keen to continue expanding its European operations.
According to research from management consultant Oliver Wyman, there could be a total of 20 million new brokerage accounts opened in Europe by 2025. Germany, Italy and Spain are seen as the biggest growth areas, but there are also opportunities in the UK, Sweden and Norway.
Given its asset coverage, brand penetration and popularity among retail traders in Europe, there is no reason to assume that eToro can’t capture a sizeable slice of that predicted growth.