🔬The Performance Detective: Finding True ETF Winners

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If you've been following our ETF 101 series, you may remember our previous article on ETF performance, where we explored more than just the one-year return, discussing concepts like total return, risk-adjusted return, tracking error, and dividend yield.

For those joining us today, you might be wondering how to dig deeper without feeling overwhelmed. In this weekend’s session, we'll dive into how to analyse performance numbers and interpret them like a pro, uncovering the insights the data provides about future potential.

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🕰️Time Horizons: The Story Changes Over Time

In our newsletter, we always remind readers that past performance does not guarantee future results. A key reason for this is the time horizon that you choose to consider.

Imagine you are judging a runner. If you watch them sprint for 10 seconds, they might appear incredibly fast. However, if you watch them run a marathon, their pacing tells a completely different story. ETFs operate in much the same way.

A one-year return can often be misleading due to "noise." For example, a sector may have been popular for a few months, or a particular economic event may have temporarily driven up prices. If you choose to buy an ETF because it was the highest performer in the previous year, you might purchase at the peak of a market cycle.

When analysing performance, it's important to consider Rolling Returns. This term refers to evaluating performance over multiple overlapping periods, such as 3-year or 5-year intervals.

• ✅Why is this important? An ETF that consistently performs well over 5 years is often a safer investment than one that has had only one remarkable year.

• 🔍The lesson here: don't limit your review to the "Year-to-Date" figure. Instead, explore the "5-Year" or "10-Year" tabs on your research tool. Consistency over time is a stronger indicator of a solid strategy than a short-term spike in performance.

🍎Comparing Apples to Apples (Benchmarking)

Tracking Error measures how closely an ETF tracks its index, but another aspect to consider is Benchmark Appropriateness.

To understand performance, you must know what the ETF is trying to do.

• Comparing a Technology ETF to a Bond ETF can be misleading; the Tech ETF might have higher returns, but it operates in a different context.

• An ETF that tracks the S&P 500 should be evaluated against the S&P 500, while an active ETF should be compared to other active funds within its sector.

At ETF UNO, we believe context is king. An ETF that returns 8% might look boring until you realise its benchmark only returned 4%. That ETF just doubled the market's performance! Conversely, an ETF that returns 10% is underperforming if its sector returns 15%. Always measure performance relative to its intended goal, not just in a vacuum.

📊Consistency vs. The Home Run

In sports, a player who hits one home run but strikes out ten times is less valuable than one who gets a hit every time at the plate. In ETF investing, consistency often matters more than volatility.

Today, we'll focus on Performance Stability.

Consider these two types of ETFs:

• 🎢The Rollercoaster: An ETF that jumps 20% one year and drops 15% the next.

• 📈The Steady Climber: An ETF that increases by 8% one year and 9% the next.

When reviewing performance history, aim for the "Steady Climber". It's easier to hold investments that don't swing wildly. Analyse the path of returns to see if they were achieved steadily or through a bumpy ride. Did the ETF achieve its returns through a smooth upward trend, or was it a bumpy ride that might have caused you to sell in a panic?

🧩Putting It All Together with the Radar Chart

We understand your concerns: "This sounds like a lot of work. Do I really have to check 5-year returns, compare benchmarks, calculate dividend reinvestment, and analyse stability for every ETF?"

The honest answer is that while you should do these evaluations, you don't have to do them manually.

That's why we developed the ETF UNO Radar Chart. As we mentioned in a previous article, this tool is designed to condense detailed metrics into a single, easy-to-read visual format.

• ☑️It accounts for the Time Horizon by giving greater weight to longer-term performance.

• ☑️It respects the Benchmark by evaluating relative strength.

• ☑️It visualises Consistency, allowing you to assess stability at a glance.

Our goal is to simplify the complex. We want you to spend less time crunching numbers and more time enjoying life, confident that your portfolio is built on solid performance data.

The Hidden Truths of ETF Performance💎

Before you finish your coffee and start your new week, let's recap what we've learned in this deep dive:

• Look Beyond One Year: Short-term returns can be misleading. It's important to focus on 5-year or 10-year performance data to identify the true trends.

• Contextualise the Return: Always compare an ETF's performance against its specific benchmark or peer group, rather than just against the general market.

• Value Consistency: Choose ETFs that show stable, consistent growth rather than those with erratic spikes and dips.

• Use the Right Tools: Utilise tools like the ETF UNO Radar Chart to visualise these complex data points effectively.

Investing is a journey, and it's always better with a guide. We hope this deep dive into performance has empowered you to look at your portfolio with fresh eyes. There is so much more to uncover, and we are just getting started.

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Thank you for spending your Sunday with us. Remember, knowledge is power, but applied knowledge leads to wealth. Stay tuned for our next edition on ETFs.

DISCLAIMER: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research and consider consulting with a financial advisor before making investment decisions.