Study Finds Many ETF Indexes Misleading
Past performance no guarantee of future results? That’s doubly true of ETF indexes that are “back-filled,” warns Vanguard.
By Maureen Nevin Duffy
The indexes that ETF providers advertise to help market their new funds are not giving investors a good indication of future performance, according to a recent study.
U.S. ETFs currently track at least 1000 indexes, more than half of which are less than six months old too new for investors to get a feel for possible future returns. Makers of indexes often fill in the blanks with historic data on the components to produce hypothetical index performance. But a recent Vanguard study found that a large percentage of these hypothetical, back-filled indexes that had outperformed the U.S. stock market didnt keep up after they went live as the index returns subsequently fell. What may be happening, says senior Vanguard ETF strategist Joel Dickson, is that indexes are being developed by rearview mirror investing, that is, through selection bias of what....