March 24, 2008 at 2:00 pm by Tom Lydon
One thing many exchange traded fund (ETF) providers do is "backtest" their investment strategy. They’ll use historical data, apply their strategy and measure the returns against a comparable benchmark.
Thaddeus Malley for ETF Guide wonders if the average investor knows how to consider the data and what it all means.
A number of ETFs are so new and innovative, they don’t have an index that’s been around for any kind of meaningful time frame. If that’s the case, the backtest comes in. Had this index been around for a given period of time, how would it have performed?
Malley has also noticed "historical returns" on ETF fact sheets, and he cautions that many of these returns are for the index and not the actual returns of the fund.
All in all, investors should take these numbers for what they are: hypotheticals. They’re important to illustrate trading metrics, but they shouldn’t be the sole reason you choose a fund.
