When 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.