Earlier this week eToro, the leading social trading platform and broker, launched “Copy Funds”, their next generation investment product.
Yoni Assia, CEO and Founder of eToro, says:
“Our Copy Funds are a unique investment instrument, which allows you to invest in a group of assets, bundled together according to different market strategies. “Copy Funds” are alternative investment products, tailor-made for serious investors looking to generate returns in today’s low interest-rate environment.”
How does it work:
In addition to trading themselves and copying other eToro trades, investors can now also invest in two types of funds: “Market Copy Funds” or “Top Trader Copy Funds”. Look at the current Copy Funds choice here.
Market Copy Funds bundle together different CFD stocks, commodities and ETFs under a chosen market strategy, idea or theme.
Current Market Copy Funds include “InTheGame”, with all stocks relating to the gaming industry, “BigTech”, which follows the leading technology companies, and “PanicMode”, which shorts leading indices and goes long on gold and silver. The current Market CopyFunds were created and are managed by eToro’s investment committee which, with the help of algorithms, periodically re-balances the allocations.
So while on the first glance these Market Copy Funds may look similar to the standard Exchange Traded Funds (ETFs), the “PanicMode” fund is a clear example where this differs. This fund shorts leading indices as part of its strategy, something your standard ETF isn’t allowed to do.
Top Trader Copy Funds on the other hand compromise of the best performing and most suitable traders on eToro. I.e. they don’t track instruments but people (traders).
The “CopiersPlusR4″ fund for example is made up of traders which have show a growth in copier in the last month and have a risk score of 4 or less. The “GaindersQtr” fund on the other hand focuses on selecting “solid” performing traders.
To maximise the potential of returns for investors, these Top Trader Copy Funds are selected, analysed and re-balanced automatically by machine learning algorithms. However eToro’s investment committee also periodically monitors them.
Each fund has an online prospectus which you can review. This includes the strategy, allocation and real historical performance for the past six months. The back-tested results of how the Copy Fund would have performed over the past 3 years are also displayed.
All the funds are fully regulated, eToro works under the regulation of the FCA and CySEC, and your funds are kept safe in tier 1 European banks.
There are no management fees to pay on these funds. However, the underlying financial transactions initiated by a Copy Fund in your account incur eToro spreads. Overnight and roll-over fees also apply.
The minimum investment you need to make is $5,000.
Overall I believe the “Copy Funds” are a nice offering to eToro’s trading and investment platform.
Funds which track certain industries (e.g. tech) are nothing new. However the fact that these funds can comprise of long AND short positions (e.g. the “PanicMode” Copy Fund) is something less common. Normally this is only possible for hedge funds though, which require minimum investments of $100K or even $1 million. Hence this broadens the scope of investment options available to retail investors like ourselves.
In addition when you normally buy into a fund, you pay the full capital. However with eToro’s CopyFunds you can leverage your investment. I.e. increase your potential returns, bearing in mind though that this also increases the risk.
The Top Trader Copy Funds are also fairly unique, though eToro isn’t the first company to create them. Darwinex already launched their Darwinia Index earlier this year which also invests in their top performing traders (and is performing ok). However eToro does offer more than one choice.
There are also no management, entry or exit fees to pay with eToro’s Copy Funds. Compared to the usual 1-5% fees on normal funds this does look like a nice saving. However you do pay the spreads for the instruments bought as part of the fund strategy. For the Market Copy Funds the spread cost is likely to be low since they’re pretty much ‘buy and hold’ strategies (i.e. the CFDs which are part of the fund are bought when you enter the fund and sold when you exit). Top Trader Copy Funds on the other hand will lead to more transaction in your account, basically each time a trader in the fund opens or closes a position.
In addition the overnight and roll-over fees apply if you use leverage. The higher the leverage, the higher those fees are. Something to bear in mind if you want to invest long term in a long position fund using high leverage in your account.
We may try a real live comparison in the next few months and buy one eToro Market Copy Fund and compare it’s performance (including fees) against a comparative ETF we buy. I’ll let you know the results here.
eToro customers can currently also make suggestions for new funds which is interesting. The minimum $5,000 investment requirement may however be high for some investors. However most ETFs have some minimum investment level as well, while hedge funds certainly have much higher requirements.
It’s too early to have an opinion on the performance and popularity of these funds … time will tell. As always we’ll keep you updated here and feel free to share your own experience or thoughts as well.
Please not that this is not investment advice and our opinion is given for educational purposes only. As with any type of trading, these eToro CopyFunds involve risk. Hence only investcapital you’re prepared to lose. Past performance does never guarantee future results. Contact an independent financial advisor if you’re unsure whether this type of investment is right for you.