Choosing a broker is an important step when starting to invest. There are many different options available, so picking the right one for you is challenging. We take a closer look at eToro, a broker based in Israel. We'll look at the pros and cons, the fees, convenience of setting up an account and safety. By the end, you'll be able to decide if eToro is a right broker for you to invest your savings, or if another broker suits you better.
Pros and cons of eToro
The story of eToro
eToro was founded in 2007 in Tel Aviv. They've grown to 30 million users around the world by giving their customers easy access the stock market. Do note that there's "only" 2.6 million users with money in their account so the number is quite inflated. eToro has been at the forefront of the movement to make investing more "mainstream", as shown through their adverts featuring Alec Baldwin.
One of the unique features of eToro is its CopyTrader function, which allows users to automatically replicate the trades of successful traders on the platform. This feature is particularly useful for novice investors who may not have the experience or knowledge to make their own investment decisions. Additionally, eToro offers a social feed where you can interact with your friends, share ideas, and discuss investment strategies. They were one of the first brokers to pioneer "social investing".
Like many brokers, they started with stocks, but you can now also trade commodities and cryptocurrencies on the platform.
Fees
Fee structure
eToro was one of the first brokers to offer "commission free" trading. However, things are never really free and you'll end up paying in other ways: through currency conversions, withdrawal fees, inactivity fees, spreads...
The transactions are "free" irrespective of what you purchase:
They make money on currency conversion
Even though you're most likely going to use eToro from the EU if you're reading this, their entire app is in USD. This is where eToro makes the bulk of their revenue from! The conversions between € and USD seems core to their business model. For example, if you deposit via a bank transfer, you'll pay 0.5% exchange rate costs. If you deposit via Paypal or Sofort, you'll end up paying a 1.5% exchange rate cost.
Inactivity fee encourages trading, likely at your detriment
eToro charges an inactivity fee of $10 per month if your account has been inactive for longer than 12 months. The goal is to encourage trading activity on the platform by motivating you to log in and use the platform more frequently. Through increased trading activity, eToro generates more revenue from spreads and other fees.
But for you, it will likely lead to poorer investment returns. Research has shown that frequent trading can actually reduce investment returns over the long term due to transaction costs, taxes, and market volatility. Additionally, it leads to taking investment decisions based on emotions, as well as reacting to short-term market fluctuations rather than taking a long-term investment approach.
They encourage CFDs (which are very risky)
eToro is popular for trading CFDs. A CFD, or contract for difference, is a risky type of derivative that allows you to speculate on the price movements of underlying stocks or currencies, without actually owning the underlying asset. Instead, a CFD is a contract between you and eToro, in which you agree to exchange the difference in the price of the underlying asset between the opening and closing of the contract.
One of the main risks is their high leverage, which means that you can control a large position with a relatively small amount of capital. While leverage can amplify gains, it can also amplify losses, and investors can quickly lose more than their initial investment. Additionally, CFDs can be complex and difficult to understand, particularly if you're new to investing. Before trading in CFDs, you should carefully consider the terms of the CFD contract, including fees, margin requirements, and the potential risks and rewards.
Because of these reasons, most investors lose money when trading CFDs. As eToro says themselves on their website, 76% of eToro customers lose money when trading CFDs.
Fees for ETFs
Let's focus on ETFs, which are gaining in popularity (and for good reasons). eToro has a limited selection in comparison with other brokers. They only offer 263 ETFs to purchase. Buying €1,000 of the popular IWDA ETF will cost €0 in transaction fees. However, keep note of the currency exchange fee you'll be paying. Note that you can't actually purchase IWDA but you get the same fund with an alternative ticker SWDA.
Convenience of eToro
Automated savings plans
You can set up recurring deposits using eToro but it simply funds your account and deposits the money. You'll still have to manually make the purchases. eToro does offer "ready made" portfolios that you can choose from or use the "social trader" feature but it's not fully automated.
Fractional shares
A popular investment strategy is euro-cost averaging, where you invest periodically instead of investing large lump sums in one go. You invest at fixed times, for instance every month, regardless of how the markets are performing. Most people are paid monthly, so it makes sense for their investments to follow the same pattern. A big benefit of using eToro is that you're able to buy fractions of shares. This means you can buy parts of an expensive ETF or stock. For example, at the time of writing, Microsoft's stock price is $330 meaning you could invest €100 every month into Microsoft stock and build your wealth that way. This is useful if you have lower amounts to invest periodically.
Minimum $100 to $500 deposit range
eToro complicates matters for a reason. The minimum deposit fluctuates per country but if you deposit with a bank transfer, it's $500. If you use a debit card, it's $100.
Customer support
eToro's customer support is quite helpful and they are available if you have any questions via email. If you're a registerd user, you can also use a chat to speak with them directly. eToro relies heavily on their community to answer questions. There was no way to phone them.
🇮🇹 Declaratory regime
As an Italian investor, you'll receive an annual tax report from eToro. You'll have to manually take that data and input it into your tax reports. You'll have to declare your income, capital gains as well as the IVAFE (wealth tax). Note that you'll have to complete this manually as eToro puts the burden on you as an investor.
🇧🇪 TOB ("beurstaks" / "taxe boursière")
There’s a tax on the transaction every time you buy or sell a security in Belgium. The rules concerning the tax rate are complicated, also for ETFs. Depending on the characteristics of the ETF, the transaction tax varies between 0.12% and 1.32%.
Unfortunately eToro does not help you with these tasks. You have to make the calculations yourself and then declare and pay it. Failure to do so may result in a hefty fine from the taxman.
🇧🇪 Dividend tax
eToro does not help you with the dividend tax. In Belgium, any dividend you perceive is taxed at 30%. Accumulating funds, which directly reinvest dividends, are a way around this tax. On the other hand, distributing funds distribute their dividends, which means they're taxable.
Unfortunately, eToro doesn't withhold this tax for you. So be careful in your choice of funds if you want to avoid paying the dividend tax or even having to declaring it every year in your tax form.
🇧🇪 Reynders Tax
For ETFs that consist of at least 10% bonds, there is a 30% tax on the profits made when selling. For example, if you bought a bond ETF at €100 and end up selling it later for €130, your net profit will only be €21. The other €9 will go to the Belgian state through this tax.
Unfortunately eToro doesn't withhold this tax for you. You will have to calculate and declare it yourself.
🇧🇪 Does eToro require declaring the account to the NBB?
Yes, as eToro is a foreign account so you have to declare to the National Bank of Belgium as well as on your tax returns every year.
Setting up an account
Let's dig into the details of setting up your eToro account for the first-time.
Fast to open an account
It's one of the easiest brokers to get an account set up. You can already access the app and all the data with just an email address. There's no complicated document upload or anything like that if you wish to simply take a look before deciding to use the service.
Once you wish to create your investment account, you'll need a copy of your ID card or passport. They also request a recent proof of address. We were approved within a couple of hours of setting up an account which made the process smooth. The delay was in transferring funds to the account as we did a standard bank transfer.
Create an account on the web and mobile
You can choose to create an account through either the web or mobile. Their app was quite smooth although it does feel a bit dated. What's interesting is that eToro really pushes the idea of social trading as you can create an account using your Facebook or Google information. They are one of the few brokers to offer this type of registration.
Ease of use: 3/5
As it's purely a trading app, eToro shows many details that aren't very relevant to most investors, especially for buy-and-hold index investors. This means the mobile experience can get quite clunky and fairly difficult to find the information you need to make an investment decision. The design is quite dated and there are nicer designed apps out there. You have more room on your computer to browse, but there's still an information overload. That's why we've rated it a 3 out of 5!
No children accounts and joint accounts
You're unable to set up any children or joint accounts on eToro. However, you can set up a joint configuration for deposits so you are able to link a joint account when you're depositing money onto the app.
You can create a business account
Word of warning though, the minimum deposit to open a company account is $50,000.
Is eToro safe?
Who is the regulator?
eToro is a regulated entity in the European Union and is authorised by the Cyprus Securities Exchange Commission (CySEC). As they're a global app, they are also regulated by the FCA in the UK and the SEC in the United States. They are headquartered in Israel.
Have they had any issues with the regulator?
Yes, they had numerous issues with various regulators:
- Banned in India. Most worryingly, eToro was listed as an illegal platform in India and banned by the Reserve Bank of India in September 2022.
- Fined in Italy. eToro was fined €1.3m by the Italian antitrust authority for misleading consumers about the costs of its services. As we've stated above in the review, you can see that it's not entirely "commission free" investing as there are hidden costs.
- Fined in Canada. eToro was fined by the Ontario Securities Commission (OSC) for operating without a registration. They were fined around $550,000 as they allowed 2,500 investors in Ontario to trade in CFDs.
These are considerations to take in mind if you're thinking about putting your savings through an app like eToro.
How much of your assets are protected by the investor protection scheme?
Your assets are protected by the standard €20,000 European investor protection scheme as their EU operations are based in Cyprus.
Is your cash protected by the deposit guarantee scheme?
No, your money is not protected by the €100,000 deposit guarantee scheme.
Does eToro do securities lending?
Yes, eToro engages in securities lending. Securities lending is a practice where brokers lend stocks and ETFs to third parties, and it is used as a source of revenue. eToro does this through its clearing partner, Apex, which facilitates a program lending shares to individuals and institutions. All clients of eToro Options are automatically enrolled in this securities lending program.
Make sure you read carefully all the terms you're signing with eToro.
Does eToro do payment for order flow?
Yes, eToro in the United States engages in payment for order flow (PFOF). However, we couldn't get clarity for the Europeans so it's unclear. PFOF is an important source of revenue for many new brokers, including Trade Republic. This practice involves routing your orders to certain market makers, who then pay the broker for the right of executing these orders. PFOF can work at your detriment, as brokers may prioritise payment over executing the best possible trade for you.
eToro vs other brokers
The table below shows the list of brokers for buying €500 of the IWDA ETF:
We have also compared eToro with other brokers if you want to dig deeper:
- eToro vs DEGIRO
- eToro vs Bolero
- eToro vs Saxo Bank
- Alternative to picking stocks
- Best broker in Belgium to buy ETFs 🇧🇪
The easier way: Curvo
Brokers push you to trade and to pick individual companies to invest in. Rather than picking individual stocks such as Amazon or Tesla, index funds are a way to buy the whole market, across all sectors and regions of the world. Essentially, you own a small portion of thousands of companies throughout the world. Instead of betting on a particular company, you are placing a bet on the global economy.
Rather than having to pick the right stocks or ETFs among the thousands available through a broker like eToro, you invest in a portfolio that is tailored to you and your goals. These portfolios are composed of globally diversified index funds, meaning you earn a piece of the growth of the global economy, and they're best suited to make the most of your savings long term. And they're secure, as they're managed by NNEK, a Dutch investment firm under supervision of the regulator in the Netherlands (AFM).
We believe that investing is an important tool for our generation to improve our financial well-being and to prepare for our future. We are building Curvo to fulfil that vision, by making good investing easy and accessible to all:
- Diversified portfolio set up for you: The best portfolio for you is built by NNEK based on your time horizon and financial goals. Simply answer a short questionnaire and you’ll get everything set up for you.
- Automated savings plans: Through Curvo’s app you can set up a monthly contribution from €50. That means that money is automatically invested for you in your portfolio. Put your savings on autopilot!
- Fractional shares: All the money you send towards your portfolio is fully invested by NNEK. No cash is left on the side.
- No TOB 🇧🇪 : Significant savings as the portfolios aren’t liable for the Belgian transaction tax (or "TOB"). This saves you between 0.12% and 1.32% for every time you buy or sell!
- Sustainable investments: Your investments focus on one guiding principle: don’t invest in companies that are considered destructive to the planet. This means that sectors like non-renewable energy, vice products, weapons and controversial companies are all excluded.
- Project yourself into the future: Through Curvo you can see how much your portfolio is expected to be worth in the future. You can answer questions like “how will increasing my monthly contribution by €50, €100 or €200 affect my long-term savings?” to give a concrete idea for the “future you”.
Learn more on how it compares to investing through a broker.
Summary
eToro has established itself as the number one app for social trading, offering an easy way to get started, and "commission free" trading. Due to the fact that eToro has many hidden fees, issues with the regulators and conducts securities lending, you need to ask if it's worth the risk to invest through their app over the long-term. The fact that they offer fractional investing makes it easy to invest low amounts but consider all the risks involved before making a decision.
Questions you may have
What's the minimum deposit for eToro?
The minimum deposit starts at $100 if you use a debit/credit card. However, if you do a bank transfer, the minimum is $500.
Can eToro be trusted?
Yes. If you're a European using their app, they are regulated by the Cyprus Securities Exchange Commission (CySEC) which means you are protected by the European Investor Protection Scheme up to €20,000.
How does eToro make money?
eToro makes money from a combination of things:
- Currency conversion: revenue from conversions between € and USD seems core to their business model.
- Inactivity fees: you have to pay $10 a month if you aren't actively using their app.
- Spread fees: they make money on the difference between the bid price and the ask price of a financial instrument (like when you buy a stock!)
- Securities lending: practice where they lend your stocks and ETFs to third parties.
How many people lose money on eToro?
As stated on the eToro website, 76% of eToro customers lose money when trading CFDs.