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eToro copy-portfolios explained

Copy-portfolios are a thematic investment approach that helps users reduce risk, diversify their portfolios, and take advantage of the market´s momentum.

In other words, the copyportfolios are a portfolio management product. The thematic investment approach focuses on broader investment themes that a fund manager can use to identify strong companies.

It enables the investor to invest their money directly into a fund rather than copying a specific trader.

The copy-portfolios follow a specific industry or a range of traders that are combined into one portfolio.

The trading strategy of these portfolios are predetermined and serves as a long-term investment tool.

There are general conditions for the copy-portfolios which are: the minimum amount to invest is 5,000 dollars, the default stop loss for a copy-portfolio is set to 10% and the allocation weight of the portfolio can change over time (eToro 2020c).

There are three categories of copy-portfolios, the Market Portfolio, Top Trader Portfolio, and the Partner Portfolio. 

The Market Copy-portfolios combine assets into a single portfolio and are following a fixed market

strategy or are focusing on a more specific industry (eToro 2020c).

The market copy-portfolios have been described by Say (2019) as “something along the lines of an ETF [exchange traded fund] and are created to take advantage of a specific investment thesis”.

The professionals at eToro determine the composition of each portfolio, in combination with a machine-learning algorithm programmed to reduce the risks and increase profits (eToro 2020c).

The market copy-portfolios allows the investors to diversify within a specific industry of their interest by acquiring multiple companies at once, this way the investor can minimize company-specific risk (eToro 2020d).

The Top Trader Copy-portfolios are leaning on a CopyTrader tool. The portfolios group together already successful traders in different portfolios.

The top trader copy-portfolio similarity to the market copy-portfolio is that the traders in the portfolio are selected by eToro´s investment committee and a state-of-the-art algorithm that looks for precise trading attributes that are optimizing profits (eToro 2020c).

With the Top trader copy-portfolios, the investor has full exposure to investors from the eToro community (eToro 2020e).

An example of a Top Trade copy-portfolio is Top Active Trader which allows users to copy various investors simultaneously.

The traders in the portfolio are selected by an algorithm that is implemented in the eToro database (Ibid). With this type of portfolio, the investor can benefit from the crowd wisdom (Ibid).

Crowd wisdom is described as a “phenomenon in which the collective knowledge of a community is greater than the knowledge of any individual” by Marbach et al. (2012).

The Partner Copy-portfolio is a partnership between eToro and financial institutions/professional traders.

These portfolios are built and maintained by the partnered financial institutions, eToro simply provides them with a support system and a new range of investors.

The securities and assets are selected by the professional. However, some of the portfolios are back-tested to prove that the strategy is profitable (Greenspan, 2019) With partner copy-portfolio, the investor can invest like a professional.

One of the eToro´s partners is Tip-Ranks that has built a copy-portfolio that has the same allocation of securities as Warren Buffett or Carl Icahn, by their SEC filings (eToro 2020f).

As mentioned above-market copy-portfolios follow a specific sector. Thus, picking the stocks for the portfolio does not really demand skills as the portfolios pick the stocks within a specific sector.

When looking over the data of the market portfolios a large number of the portfolios have a beta greater than one. This means that the market copy-portfolios are more volatile and a riskier investment than the stock market as a whole (Streissguth 2019).

However, a high beta may offer higher returns on the investment if an investor is willing to bear the risk. From this, it can be expected that market copy-portfolio returns are only a product of systematic risk and should not be able to beat the market in the long term. However, in top trader and partner copy-portfolios the portfolios are either grouped together from already successful traders into one specific portfolio or the portfolios are built by financial institutions/professional traders, which are trying to beat the market.

Therefore, an alpha or skills could be recorded from these copy-portfolios if the market is inefficient and the copy-portfolio traders are able to pick better investments.

The positive side of all of these copy-portfolios is that they are fully transparent. Investors can see the historical performance of the portfolios and how the portfolios are allocated.

Furthermore, the investors can close their positions at any point-of-time (Ant 2017). A negative aspect which occurs in all of the copy-portfolio is the removal of the invested capital.

In the copy-portfolios it is not possible to remove a portion of the invested capital. Instead, the whole investment has to be closed altogether (Hayes 2020). Furthermore, the withdrawal fees are high and slow (Korpos 2019).

Amit Kupfer

Amit Kupfer

Amit is the founder of Social Trading 101. He is a passionate value investor. His investor's "heroes" are Bruce c. Greenwald, Peter Lynch, Philip Fisher & Warren Buffett. Copy my trades on eToro 👉 https://etoro.tw/3nA3gTb

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