As everyone on this forum knows:
If “active” and “passive” management styles are defined in sensible ways, it must be the case that
(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollarOn average, funds with lower fees have better performance and passive funds have the lowest fees.
But here comes eToro, a shady-looking broker that has a peculiar way of handling costs associated with actively-traded funds. This platform, which somehow combines the worst of Robinhood’s casino UI and Facebook’s toxicity, has a program in which some users can invest on behalf of other users. According to their assets under management, they are paid by eToro itself, and do not take a percentage from the managed funds or the performance.
In a nutshell, every individual investor on eToro is subsidizing the salaries of some active fund managers. On the one hand, stocks and ETFs are commission-free. On the other, there are lots of leveraged and very expensive instruments available on this casino platform, and unsophisticated retail traders are generating all the necessary income for eToro to redistribute.
The “free lunch” comes from the fact that the broker wants to attract talented managers to its platform with a generous remuneration, but these managers do not have to construct an expensive portfolio, nor do they have an incentive to trade frequently.
Of course, this is all good in theory, but it would be better if this platform actually had some talented investors among all the degenerate gamblers.
I personally took a leap of faith in 2019, trusting some guy to manage my portfolio. When I write it down like that, it seems like a crazy idea, but my rationale was that, until recently, trustworthiness of finance professionals stemmed mostly from external sources, such as the name of well-known firms. On eToro, instead, it can be based on evidence of skills.
So I invested 20k in a fund managed by an investor called Jeppe Kirk Bonde.
Here is some data about the fund from the last quarterly conference call:
25% average annual return since 2013 with relatively low volatility.
A performance similar to Cathie Wood on the way up within the same time frame (ARKK was founded in 2014 and Fundsmith Equity Fund dates from 2010) and a performance similar to VT on the way down.
| Average annual return | Sharpe Ratio | |
|---|---|---|
| Bonde | 25% | 0.90 |
| Buffet | 19% | 0.72 |
| Smith | 16% | 0.79 |
| Wood | 10% | 0.01 |
| Dalio | 6% | 0.80 |
I didn’t have a lump sum to invest, but had I done so, I would have had an average annual return of 9.05%. Since I dollar cost averaged, my CAGR is currently at 3.82%. This is an investment I’m making for the long term, and I’m comfortable with the risk I’m taking, as I’m only 24 years old.
What bothers me more is that eToro hasn’t yet become a reputable company. It operates from many different countries, so I asked to register under eToro (UK) Ltd., which is better regulated than eToro (Europe) Ltd. The former offers £85k of capital protection, while the latter is only €20k.
I’m not posting this as advice on how to invest, but rather as an opportunity to discuss our assumptions. The expense gap between actively and passively traded portfolios can be bridged with this business model, and more importantly, the biases in the process of becoming an investor may be challenged. Instead of attending a prestigious university, getting a job through connections, and impressing clients with a nice car, it’s becoming possible to let results speak for themselves.
What do you think?