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.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.