Backtested Data Can Be Useful With ETFs, But Use With Caution

July 02, 2008 at 1:00 am by Tom Lydon

Eco_iq_testWhen it comes to hypothetical returns for exchange traded funds (ETFs), is back-tested performance data misleading?

A slew of the newer ETFs are based on customized indexes that have no real-time performance history, so providers display hypothetical numbers, reports Dan Jamieson for Investment News.

Here are a few examples of back-tested results:

  • PowerShares Dynamic Market Portfolio (PWC): 10-year returns of 8.5% compared to 3.5% for the S&P 500.
  • PowerShares FTSE/RAFI US 1000 Portfolio (PRF): annualized 10-year return of 7.1% compared to 3.5% for the S&P 500.
  • WisdomTree Total Dividend Fund (DTD): gave a 10-year return of 6.4% compared to Russell 3000’s 3.9%.

Remember, a back-test is just one tool used in evaluating a strategy. Keep in mind that hypothetical results are meaningless unless third-party researchers are going to validate findings.

And while having some kind of a track record is helpful, it’s extremely important to remember that the past is not indicative of the future.

Subscribe

Enter your e-mail address below to sign up for our free e-mail newsletter, the Daily Market Update. We will never share your e-mail address with third parties.

Leave a Reply

    • Andy: You have to be careful when choosing your asset allocation. Many people are under the impression that you get...
    • Andy: There is a useful tool at http://www.assetcorrelation.co m that lets you check the degree of correlation...
    • Tim: Of course, China’s recent market manipulation of the dollar helps too, as their central bank reportedly...
    • Tom Lydon: Hi BG, We apologize and should have taken a moment to note that ETNs differ in their structure from ETFs,...
    • ETF Guy: I’ve been in commodity ETFs for a 2 or 3 years now. Some them trigger some uncommon (for me anyway)...

Recent Podcast

Tom Lydon Talks About iMoney, ETFs and Why You Should Own Them

 
 Tom Lydon on FT Press - August 11, 2008: Play Now | Play in Popup | Download