IUSV - ETF Analysis: Do Historical Returns Predict Future Returns?

2024-04-13 10:30:00 ET

Summary

• Many analysts point to an ETF's track record when deciding whether to assign a buy rating. Relative performance compared to other ETFs in the same category often dominate the analysis.
• Common evaluation periods include an ETF's one-year, three-year, and five-year returns. However, an in-depth discussion about the predictive ability of those statistics is usually absent.
• This article provides that discussion by ranking hundreds of small-cap, mid-cap, and large-cap ETFs by their one-year, three-year, and five-year returns, and then evaluating how well they performed afterward.
• This article also examines large-cap ETFs by style and assesses whether the "performance-chasing" strategy works either with the value, blend, or growth segments.
• With this analysis, I hope to educate readers about whether historical returns should form a significant part of the analysis of an ETF, or if they're just interesting data points.

Article Purpose

Historical results are among the first things many investors consider when analyzing ETFs. Except for contrarians, investors search for funds with solid one-year, three-year, and five-year returns, as this is evidence the strategy can work, notwithstanding macroeconomic changes or changes in the portfolio's composition. But you might be wondering how well this simplistic strategy works and determining that is the purpose of today's article. In this report, I will evaluate the "performance-chasing" strategy by looking at trailing and forward one-year, three-year, and five-year returns by segment and style for hundreds of U.S. Equity ETFs. I think you'll find the results helpful, and I hope you can use the information in this article to become a better investor.

ETF Performance Analysis

Background

Many readers are familiar with Portfolio Visualizer, a free tool that lets you compare the risk and returns of up to four securities at a time. You can also "optimize" your portfolio by entering a set of assets and the period to evaluate, but there's one catch. By default, the tool uses an asset's historical metrics as inputs. As a result, the output is what asset combination would have worked best in the past, thereby providing some investors with a false sense of security. While it appears they're doing proper due diligence, they're just checking past performance....

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