eToro Review: Performance
Your performance when investing with eToro is directly linked to the performance of the trader (“Popular Investor”) you decide to copy in your account. Obviously not all of them are winners and your performance will mainly depend on your selection. However, in this part of the review we mainly focus on whether your results will be the same as the results reported for the traders (“Popular Investors”) in the eToro interface.
On an individual trade level, when we compare the prices at which the trades get executed in our live account, with the prices the trader received in their eToro account, we’ve noticed that more than 90% of the time they’re exactly the same. Only on very few occasions does the price slightly differ, though normally that would only be about 1 pip difference for Forex trades. Hence with eToro, unlike with some other social trading networks, slippage isn’t really much of an issue. Obviously this is because eToro acts as the broker for all the traders as well as for all the investors. Therefore the trade copy execution time should be quicker and more reliable (since it’s all within 1 broker and not between connecting brokers) and the spread on each trade will also be the same for everyone. Yes, arguable the spread isn’t the most competitive within the industry, though it’s also not the worst.
With regards to whether your performance (and gains) will actually be the same as the % gains reported in the eToro interface the story is a bit different. Before February 2015 eToro uses the Modified Dietz formula to calculate the gains and the numbers presented weren’t very transparent (i.e. we never were able to re-calculate them). In addition, the results were also distorted because the traders used to get paid in trading bonus credits for every copier they had (this changed in 2014). This meant popular traders would actually automatically get more “free” capital in their account to offset against losses or open losing trades (drawdown).
As with most of these things it’s obviously easier to demonstrate this with a clear example, so we actually started two $10,000 demo accounts on May 1st 2012 and June 1st 2012. At the time we invested $1,000 evenly in the 10 most popular traders (i.e. the ones with the most live copiers). We did not make any further changes to the allocations and let the accounts run for 1 year (taking monthly snapshots of the performance). Below are the screenprints which show the status of the accounts after 1 year. Please note that while these accounts were demo accounts, your performance would have been the same for a live account (we have run separate tests comparing our main live account with demo accounts and results are the same).
eToro Trader Performance Comparison: 1st May 2012 – 30th April 2013
The first column of % gains (green) and losses (red) are those reported by eToro in the “people table” and “trader profiles” on May 31st 2013 when you select time period 1 year. Unfortunately we missed recording the result for waleed0987.
The second column we added displays the actual results. To calculate the % gains or losses for each trader we use the following formula: (Units – Net Profit)/1000. I.e. we take the actual balance (including unrealised profits or losses) and calculate the % difference with the initial $1000 invested in the trader.
Please note that 1 trader ‘robepu’ lost all their $1000 allocation and hence was no longer displayed in the table. Moksel1972 and Jegadeesan777 left eToro soon after the account was opened and hence they weren’t active traders during this period. In addition, eToro automatically added $2000 to the demo account for further trading. We did not invest this amount, though $199.01 of this balance was used (we assume for trade carry costs).
Overall the value of the account after 1 year was $8,725.98 (this includes balance – unrealised losses – carry costs). Baring in mind this was just picking the top 10 and distributing the investment evenly, without putting in any effort or taking into account our eToro trader selection tips, this result is actually not too bad. Most of the losses were contributed to ‘robepu’ and ‘waleed0987′ and without them the account would have been profitable.
With regards to the difference reported by eToro and the actual account results, while some are fairly significant, in most cases eToro’s numbers were actually more pessimistic than the actual results.
eToro Trader Performance Comparison: 1st June 2012 – 31st May 2013
The calculations for the % gains below were done exactly the same as above, with the difference being that this account was opened 1 month later, though results are compared over 1 year as well.
From the $2000 which eToro added to the initial balance, $213.36 was used for trade carry costs. Overall, the value of the account after 1 year was $9,236.71. Again, while overall this is a loss, the performance is again not bad considering no real consideration was given to which traders to pick and how the money would be distributed between them (again the top 10 in terms of number of people copying them on eToro was used). Without copying michaelfx, who blew the $1000 in a few weeks, the account would even have been profitable. So taking into account our eToro tips one should assume better results can be achieved.
The differences in gain & reporting are clear too, though again on most occasions your actual results would have been better than those reported by eToro in the trader profiles and rankings.
Another interesting point when comparing both accounts relates to the timing of your investments on eToro (something we also discuss in our tips). For example, the difference in performance after 1 year for Malsolo (+63.7% vs +28.1%) or ($356.17 more profit on a $1000 investment) is quite significant, baring in mind that there was only 1 month difference between both investments.
Since the introduction of the new simplified gains % calculation in February 2015 and the abandonment of the eToro credit bonusses paid to “Popular Investors”, the results achieved in your account will reflect those displayed for the traders you copy more closely. However, if you start copying a trader who already has a number of open trades in their account when you start copying them they will still not be exactly the same. Your results will be more closely matched if you start copying the open trades as well, though I always question the logic and rational for doing this.
In summary, looking at the statistics above, it’s clear that money can be made on eToro. However, it’s unfortunately not as simple as picking the top 10 traders and some effort will be required to pick the ones with the best potential for your requirements (again – refer to our eToro tips and try a demo account first). It’s also clear that the gain percentages reported by eToro do not necessarily match how the investment would have performed in your account, though the figures aren’t necessarily overly optimistic in their favour and gains normally mean gains.