Today, I want to discuss something that could save copiers a lot of money on eToro. Not just my copiers, but everyone who uses the platform.
Have you ever noticed a trader posting impressive returns, say +50%, for a certain period, but when you check your copy, it’s only showing +15% for the same timeframe? How is that possible? Why does it happen?
Have you ever seen a PI suggesting to add funds to your copy on a regular basis, often through Dollar Cost Averaging (DCA)? It sounds like a smart strategy, right? But hold on, let’s see if you feel the same by the end of this article.
When you add more money to a CopyTrader account, it triggers something called "automatic reallocation" or "rebalancing".
You can read more about it here: help.etoro.com/s/article/What-does-automatic-reallocation-mean-in-CopyTrader?language=en_GB
But to put it simply, when you copy a trader, your portfolio must proportionally reflect the trader’s portfolio. For example, if the trader holds 10% in $NVDA (NVIDIA Corporation) and 20% in $AMZN (Amazon.com Inc) , your portfolio will also allocate 10% to Nvidia and 20% to Amazon. If the trader adjusts their allocation, the system automatically rebalances your positions to match the new allocation. Essentially, your portfolio is a mirror of the trader’s portfolio.
In order to explain in a better way how deposits can affect your profitability, imagine the trader you are copying has 100% of their portfolio invested in Nvidia. You’ve copied them with $10,000, meaning you have $10,000 in Nvidia.
Following your PI's advice to add funds on a monthly basis, you deposit $100 and increase your copy.
Now, your total copy investment is $10,100, with $10,000 already invested, and $100 waiting to be allocated when the market opens.
Here’s where eToro’s system kicks in. It sees that the trader has 100% invested in Nvidia, but you now have only 99.01% of your portfolio in Nvidia ($10,000 out of $10,100). To correct this, the system rebalances your portfolio to match the trader’s 100% allocation.
You might assume that eToro would simply add the $100 to your existing Nvidia position, but that’s not always the case. Instead, the system may close your entire Nvidia position and reopen it to ensure that your portfolio’s allocation perfectly mirrors the trader’s. You can read it from the link above and from this message from an eToro customer assistant: "When you deposit more funds, eToro aims to maintain the exact proportion of each asset in your copy compared to the copied investor's portfolio. To do this, it might close and reopen positions to rebalance everything precisely according to the new total amount in the portfolio, ensuring alignment with the copied investor's current allocations."
You may think: "Ok, so what? Say that eToro closes my entire position on Nvidia to reopen it again immediately, what's the big deal?"
The current spread on Nvidia is 0.164%. Closing and reopening the position costs you 0.164% on your entire $10100, which is a total of $16.56. Essentially, you’ve paid a fee of 16.56% on your $100 deposit. To break even, the trader would need to make nearly +20% on your new $100 investment just to cover that loss.
And we were talking about a very liquid asset like Nvidia, where the spread is relatively low. But when it comes to less liquid assets, such as cryptocurrencies, the impact can be even more significant. On $XRP , for instance, the spread is currently at 2.17%. You would deposit $100 on $10,000, risking that the rebalancing effect takes your equity to $9881. In this scenario, you’re essentially depositing money only to see an immediate loss, rather than growing your investment.
This is one of the reasons why your returns might differ from the trader’s.
It also highlights why blindly adding funds through DCA might not always be the best strategy. A more strategic approach is necessary to maximize your profitability, that is why I always try to keep in touch with my copiers through comments and/or LinkedIn to offer my opinion on when and how to add funds. My philosophy is that the work of a PI is to maximize copiers' profits, not to decorate their stats page with returns that do not match the ones from copiers.
The example provided was an over-simplification to keep the math simple while illustrating the concept.
This insight comes from my own experience and observations on eToro over the past six months. I welcome thoughts from more experienced users or anyone who has had different experiences.
Thanks for reading, and good luck with your investments.
$NSDQ100$BTC... Show More
I totally agree with this post and estimate that auto reallocation and rebalancing costs copiers 2-5% margin p.a. Just one example is selling my copiers $BTC and rebuying it when I am definitely not closing any $BTC trades. Makes no sense at all. Someone must be gaining through this process ( Urm eToro)... Show More
Very well and simply explained. It answers a lot of questions I had about my performance on copy trade. It raises a good question on whether copy trades are in fact a good option considering the potential high fees incurred. ... Show More
I got lied to someone told me btc would he way way high and like he's a trader on here that people follow its not you.. bit ik still upset I was lied to :( this isn't what I was promised where my beach side house villa ? ... Show More
Bravo Federico, merci pour cette belle et simple synthèse de la copie et des incidences d'apports supplémentaires ! Très cordialement Frédéric ... Show More Translate
In the scenario you mentioned, I believe it would not close and rebuy the position.
Automatic reallocation is capable of calculating what the most efficient way is for your portfolio to match the PI’s. Therefore it only sells off the amount needed, if any needs to be sold at all (in your example, it... Show More
Ciao Federico, avevo già espresso il mio feedback positivo si alcuni tuoi post, e lo farò anche oggi.
Purtroppo, vedo che nei profili dei miei copiatori, ci sono un sacco di posizioni riaperte o chiuse, ma senza che io le avessi "modificate", per appunto priorio dopo che fosse partita la "riallocazione... Show More Translate
Unsurprisingly despite following you (on 3 different watchlists...don't ask), I don't see this post without directly searching for you (which I can't do on mobile app anymore).
I always disliked the new syncing system, it felt to me like a rather rushed design..but at the same time I get... Show More
I think I'm missing something.
I do deposits every month, which is supposed to trigger the realocation.
I went looking to some of my public copiers and I thought that most of them would have all of their positions near 0% gain or loss since you said that it would close and reopen everything. But... Show More
Interesting, thanks for sharing ,
ive tried the copy trading myself and i didnt like always in loss, also because you open the position not the same as the PI who openned the position when it was in low price so its never gona be the same, you gona always lose and he is gona always win, what im doing... Show More
Thank you for this post, I’ve found it very useful. I’ve always understood that there would naturally be difference between PI’s and copiers, but thought this was due to the time the copy was opened.
I have gained a few copiers lately and I think a lot about how I should communicate, explain the differences... Show More
Simple explanation to a problem that me myself was wondering. Now the solution could be to make an adjustment to the rebalancing algorithm ... Show More
Hello! Important article and a completely correct reference to a costly problem with automatic rebalancing.
However, that is not the main reason why such asynchrony of returns occurs between PI and copiers. It certainly plays a role, but if one portfolio generates 50% and the other 15%, there is a different... Show More
Haha 😂 my copier runaway after auto rebalancing. His profit was initially higher than mine but later etoro closed his trades and reopened at higher price 🙄... Show More
