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“There’s an inherent selection bias,” Dickson said. “Nothing sells like past performance.”In addition, providers are increasingly releasing ETFs soon after indices are launched, leaving little time to collect live data. Vanguard found half of the 1,000-plus indices studied were less than six months old before an ETF was launched to track them. Dickson said this leads him to believe there might be a relationship between ETF and index creation. “Indexes are being created with an ETF in mind,” Dickson said. “That is, an ETF sponsor actually may ultimately be the genesis of the index idea, and then talks with the index provider, who will brand it and license it.”More than half the indices use back-tested performance data in lieu of or in addition to live-performance data. Naturally, ETF sponsors only choose market funds that have done well according to back-tested data.“As any plan sponsor will attest, whether it’s past live performance or back-tested, you never see bad historical information,” Dickson said. “You only see that from your existing managers—never a prospective manager.”But an index’s positive past-performance can lead investors to assume it will also perform well in the future. Dickson said this is not the case.“The winners in the past are just as likely as any strategy to be winners or losers in the future,” he said. Dickson said differentiating back-filled data and live date can be a challenge. In the study, researchers found that information through footnotes on index fact sheets on providers’ websites. “Even then it wasn’t always clear when the live date was versus any back-filled data,” Dickson said.
“There’s an inherent selection bias,” Dickson said. “Nothing sells like past performance.”
In addition, providers are increasingly releasing ETFs soon after indices are launched, leaving little time to collect live data. Vanguard found half of the 1,000-plus indices studied were less than six months old before an ETF was launched to track them. Dickson said this leads him to believe there might be a relationship between ETF and index creation. “Indexes are being created with an ETF in mind,” Dickson said. “That is, an ETF sponsor actually may ultimately be the genesis of the index idea, and then talks with the index provider, who will brand it and license it.”
More than half the indices use back-tested performance data in lieu of or in addition to live-performance data. Naturally, ETF sponsors only choose market funds that have done well according to back-tested data.
“As any plan sponsor will attest, whether it’s past live performance or back-tested, you never see bad historical information,” Dickson said. “You only see that from your existing managers—never a prospective manager.”
But an index’s positive past-performance can lead investors to assume it will also perform well in the future. Dickson said this is not the case.
“The winners in the past are just as likely as any strategy to be winners or losers in the future,” he said. Dickson said differentiating back-filled data and live date can be a challenge. In the study, researchers found that information through footnotes on index fact sheets on providers’ websites.
“Even then it wasn’t always clear when the live date was versus any back-filled data,” Dickson said.