Mati Greenspan
By Mati Greenspan
10 Min Read

Investing with Smart Portfolios

Social trading opens the opportunity to diversify and moderate risk in a way no other trading platform can. Some social trading platforms have created special portfolios of securities and traders designed to give their users an extra edge. They give traders a chance to invest in pre-set Smart Portfolios.

 

Some of these Smart Portfolios follow the market or indices, some Smart Portfolios invest in a group of elite traders, and some are promoted by professional traders. When you have a broad range of investment choices, you can use these Smart Portfolios to diversify, reduce risk, use as long holding positions, or extend the reach of your investment money. While other platforms have a range of services, we will be looking at eToro’s proprietary Smart Portfolios in this chapter to give you an idea of the investing possibilities available to you.

17.1 Top Trader Smart Portfolios

Grouping together top traders allows spectacular diversification, especially for investors with only a small amount of money. Even a few hundred pounds can be put to work by dozens of traders. This use of the crowd magnifies the diversity of your portfolio to potentially reduce risk. Smart Portfolios can group traders according to what they trade, their performance, or how frequently they trade. Platforms may use management or complex algorithms to pinpoint ideal traders for Smart Portfolios and to rebalance the Smart Portfolios.

 

For example, here is how eToro draws on the strengths of their best traders. The returns listed are as of 17 July 2017. While Smart Portfolios may be lower risk, remember that all trading carries risk. And past performance does not guarantee future results. 

 

Quarterly Gainers: This Smart Portfolio is rebalanced every quarter with up to 50 of the platform’s top solid traders. The algorithm looks for traders who are most likely to generate positive growth in the next quarter. Traders must stay within the Smart Portfolio risk score parameters to remain in the Smart Portfolios. It has invested in ETFs, currencies, commodities and stocks with a risk score of 2 (out of a risk level from 1-10) while returning 10% in the last 12 months.

 

Active Traders: This Smart Portfolio draws on a group of frequent traders with proven track records. Algorithms select those traders expected to have the best risk/reward ratio. It sets tight stops and only allows small drawdowns before stepping out of a trade. The average risk score is 2. Over 50% of its holdings are currently in stocks with the rest spread across currencies, cryptocurrencies, indices, commodities, and ETFs. Return for the last 12 months: 16%. 

 

Trending Traders: This Smart Portfolio draws on the ten traders with a risk score of 7 or below who are gaining the most copiers. The Smart Portfolio rebalances monthly and is managed by eToro’s investment committee. As of July 2017, the Smart Portfolio was heaviest in stocks, but that could change as the traders are rebalanced. This Smart Portfolio allows slightly larger drawdowns of up to 3.5% weekly as it returns 53% over the last 12 months. It carries an average risk score of 3.

 

CopyPlus R4: This Smart Portfolio  uses social trending to choose low risk traders with the biggest upswing in copiers during the previous month. The eToro investment committee rebalances the Smart Portfolio monthly with new traders. It has a risk score of 3. Over the last12 months this Smart Portfolio has returned 13%.

 

Using the crowd to trade dilutes results but also moderates risks. Individual traders may perform better, but these Smart Portfolios are a great way to spread a small amount of money across a broad range of assets.

17.2 Market Smart Portfolios

Another way to invest is to place your money into a bundle of securities of a specific class. Here you gain access to different market sectors. You can choose a specific area of the economy that you believe is heating up. 

 

You can also use these Smart Portfolios to diversify. If you copy a trader investing in currencies, you might choose to hold a Smart Portfolio that invests in indices or blue chip stocks to reduce overall risk in your account. These Smart Portfolios restrict assets to sectors as opposed to the fluid trading and diversity found in many traders you may copy.

 

Here are some of the market Smart Portfolios traders on the eToro platform you have access to. Returns are prices as of July 2017. You know this already, but compliance says we need to say this each time there’s a link to eToro. ‘All trading involves risk. Only risk capital you are prepared to lose and past performance does not guarantee future results’. 

 

The Big Banks: Banks in particular, follow cycles. If you believe banks and financial institutions throughout the world are in an uptrend, this is your Smart Portfolio. It is 100% invested in stocks in the financial sector and is rebalanced periodically by the eToro investment committee. It has a risk score of 5 and has returned 45% in the last 12 months.

 

Big Tech Companies: Want a bite of the Apple… and Google, Microsoft, Amazon, Facebook, Alibaba, eBay and others? Gain a piece of all of them with this Smart Portfolio. The risk score is 5 and it has returned 40% in the last 12 months.

 

In the Game: Gaming may be one of the hottest and fastest growing market sectors.You can put fun into your portfolio with this Smart Portfolio. It holds NVIDIA, Sony, Activision Blizzard, Electronic Arts, Zynga, GameStop, and others. The volatility of gaming stocks increases the risk score to 5 and returns from the last 12 months are currently 60%.

 

All Stocks: If you want to diversify into stocks in all the major indices, this Smart Portfolio may be for you. It invests in the biggest stocks from the biggest economies in the world including the Dow Jones 30, S&P 500, Nasdaq 100, China 50, DAX30, Euro Stoxx 50, AUS 200 and more. It has returned 25% over the last 12 months and carries an average risk score of 5. 

 

Gold and Energy: Think it’s time for a gold and energy comeback? Invest in the hard commodities with the Smart Portfolio that holds ETFs from the energy sector and CFDs in stocks and commodities. Gain a stake in US Natural Gas (UNG), US Oil (USO), SPDR Gold (GLD), Energy Select Sector SPDR (XLE), Junior Gold Miners ETF (GDXJ) and Gold Miners (GDX) and more. With an average risk score of 4, this Smart Portfolio has returned -9% over the last 12 months.

 

Crypto-Currencies: This Top Cryptocurrency Smart Portfolio invests in Bitcoin and Ethereum giving Bitcoin the heavier weight. Easily gain access to one of the fastest rising currencies in the world. It has higher volatility but offers the potential for impressive gains. Highly volatile cryptocurrencies usually carry a risk score of 7, and has returned 52% since inception.

 

Crypto Smart Portfolio: This Smart Portfolio  takes advantage of all cryptocurrencies traded on eToro. It currently invests in Bitcoin, Dash, Ethereum, Ethereum Classic, Litecoin, and Ripple. The Smart Portfolio’s initial allocations gave Bitcoin about 50%, Ethereum about 25% and the remaining cryptocurrencies about 5% each.This Smart Portfolios is rebalanced each month, while the weight of the assets may change any time at the discretion of the Portfolio Manager. 

 

US Market ETFs: Jump into the largest economy in the world if you believe it will become even bigger. This Smart Portfolio gives you a piece of the entire US economy. You’ll hold CFDs in high yield American bonds and stocks from mega corporations to small businesses. It includes the Russell 2000 ETF (IWM), SPDR S&P Midcap 400 (MDY), QQQ to keep up with the FANG stocks, and others. It is rebalanced periodically by the eToro management team. It holds a score of 3 and has returned 17% in the last 12 months. 

 

Global Market ETFs: This Smart Portfolio includes all the economies of the world except the US market. Gain easy access to potential profits from Europe, Australia, Japan, China, Russia, Brazil, and many emerging markets. The portfolio is periodically rebalanced by the eToro management team. Over the last 12 months, it has returned 15% with a risk score of 3.

 

Sector ETFs: Spread your assets across the entire US economy by investing in ETFs in a broad range of sectors including consumer staples & discretionary, finance, healthcare, infrastructure, real estate, technology, utilities, and more. This Smart Portfolio holds a risk score of 3 and has returned 15% in the last 12 months.

 

Food and Drink: This Smart Portfolio is designed to cycle stronger in economic weakness when consumer staples are a dependable fall-back. Invest in McDonald’s, Starbucks, Coca-Cola, General Mills, Dean Foods, and the like. It has a risk score of 4 and a return of 8% over the last 12 months.

 

Travel and Leisure: Traders may want to jump into the travel and leisure market created by low-interest rates and more discretionary income. They have an easy way to invest with this Smart Portfolio. It includes hotels, airlines, booking agencies, credit card companies and upscale shopping. It holds a risk score of 5 and has returned 16% in the last 12 months.

 

Four-Horsemen: Invest in the four largest technology companies if you believe these super-heroes of the new tech age will continue to excel. eToro’s investment management team will rebalance the Smart Portfolio as needed. A new eToro Smart Portfolio, it has a risk score of 4, and has returned 14% since it’s inception in February of 2017.

17.3 Directional Smart Portfolios

Traders may want to look at Smart Portfolios that focus on the market direction. With a basket of CFDs and shorts, it becomes even easier to take advantage of downturns. Old time investors say that some stocks can lift a market, but when the markets fall, 80% of the stocks dropped in value, regardless of their fundamentals. When traders see technical analysis that indicates a potential pullback, they may want to invest in Smart Portfolios that make it simple to take advantage of the drop.

 

For example, eToro has several Smart Portfolios designed to profit in bear cycles. Most of these are new Smart Portfolios at eToro and have not yet developed a risk score or track record. 

 

PanicMode: This Smart Portfolio is for traders who expect the markets to dive. It goes short on stocks and long in metals. This Smart Portfolio is a clear directional play you may want to use in short pullbacks.

17.4 Partner Smart Portfolios

Some platforms invite professional traders to offer branded Smart Portfolios. It is beneficial to the professional because they get the support system and the exposure to a whole new group of investors. It’s also beneficial to the traders because they have an opportunity to build on the depth of experience and skill a professional brings to the table.

 

These Smart Portfolios are set up and maintained by the professional trader. They choose the securities, the asset allocations and when to rebalance the Smart Portfolio. Some Smart Portfolios may be back-tested to increase the probability the strategy will produce the desired returns. It is a reflection of the professional’s investment style and research. Some Smart Portfolios have eToro management mimicking the style of famous investors.

 

Because platforms may have chat rooms or feeds, copy traders have remarkable access to the Smart Portfolio administrator. They can ask questions or offer suggestions. They gain insights and may learn more about the Smart Portfolio, the securities, and investing strategies from the professional as they interact. Remember though, all trading involves risk, and past performance does not guarantee future results.

 

eToro offers several Partner Smart Portfolios with more on the way. 

 

AlphaCore by WeQuant: WeQuant are the portfolio managers of the parent company, WeSave, and are based in Paris. This Smart Portfolio invests across all markets with ETFs that follow indices. Its goal is to deliver performance with minimal fees. The core-satellite strategy builds a core portfolio based on deep market analysis and macroeconomics. The satellite portion follows market thematic rotations. Top trades are QQQ, SPX500 and HYG. It has a low risk score of 3 and a return since inception of 6%.

 

WarrenBuffett-CF follows Berkshire Hathaway: This Smart Portfolio is managed by the portfolio manager of eToro (Europe) Ltd. It mimics the legendary Buffett’s investment methods and the stocks held in Berkshire Hathaway. The Smart Portfolio includes businesses engaged in property and casualty insurance, utilities and energy, rail transportation, finance, manufacturing, retail and services. The main holdings as of July 2017 are  Kraft Heinz Company (KHC), Wells Fargo (WFC), Apple (AAPL), and Coca-Cola (KO). With a risk score of 3, this Smart Portfolio has returned 4% since inception.

 

WorldEquityPlus by Tachlit Tracking: Meitav Dash, a leading Israeli investment house collaborated on this Smart Portfolio . It is designed to beat the MSCI ACWI index, which is a benchmark for the world equities markets. The Smart Portfolio banks on rising oil prices while managing risk. Major holdings are iShares MSCI ACWI Index Smart Portfolio (ACWI), Emerging Markets index MSCI iShares (EEM) and SPDR S&P Midcap 400 (MDY). With a risk score of 3, the Smart Portfolio has returned 3% since inception.

 

CarlIchan-CF follows Carl Icahn C: This Smart Portfolio is based on the SEC filings of Carl Icahn Enterprises. This American business magnate and investor holds substantial positions in corporations engaged in automotive, energy, food packaging, gaming, home fashion, investments, metals, mining, rail cars, and real estate. Top positions are Icahn Enterprises (IEP), American International Group (AIG), and Cheniere Energy (LNG). This Smart Portfolio carries a risk score of 4 and a return since inception of 0%.

EWachenheim-CF based on Greenhaven Associates Inc: Greenhaven Associates in the UK manages over $5 billion in assets. This Smart Portfolio seeks to duplicate the success of Edgar Wachenheim’s strategies. Major securities include Goldman Sacks (GS), FedEx Corporation (FDX), and Citigroup (C). This Smart Portfolio has a risk score of 4 and a return since inception of 11%.

17.5 Conclusion

Smart Portfolios, copy traders, CFDs, and inventive online platforms are all part of the fintech revolution that makes investing more accessible to the average trader. It introduces simplicity and accessibility to traders all over the world. It brings new possibilities to invest in currencies, commodities, global stocks, and international indices. 

 

The fintech revolution also opens up new kinds of investing opportunities and new ways to think about money. Never before have investors been offered the chance to buy and trade the decentralised currencies like Bitcoin. The blockchain and cryptocurrencies also show how technology is transforming the ways we think about money, and even stocks. 

 

Instead of traditional IPOs (initial public offerings) of stocks, fintech companies offer ICOs or initial coin offerings. New blockchain companies use crypto-tokens instead of stock as a way for investors to own a portion of the company.

 

Even in the new fintech world, there are some constants. Traders need an investment plan and a trading strategy. They are more likely to find success as they add a steady amount to their investment portfolio each week or month. They must assess the risks of their trades against their own personal risk tolerance. 

 

And there is the constant truth that trading involves risk. You can lose your capital. But you may also capture a portion of the vast wealth generated by the financial sector. Past performance does not guarantee future results. But experience and training in tracking results give a much higher likelihood that you can generate consistent and profitable trades.

 

New online trading platforms that take full advantage of financial technology offer speed, ease of trades, the enjoyment of investing with the crowd, and an opportunity to see impressive results.

 

Happy trading!


This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without having regard to any particular investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilizing publicly-available information.

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

eToro
The Complete Guide to Fintech
The Complete Guide to Fintech
Chapter 17
Investing with Smart Portfolios