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Overuse of Backtesting Can Lead to Confusion

I’m glad to see the concern for an over reliance on backtesting investment strategies is starting to make itself known.  Good article here in Barrons.

Here are a few pointers we follow when evaluating new ETFs that have launched:

1)      Look for simplicity. Any strategy that appears to be vague or confusing raises flags for us.

2)      Watch the charts. It’s extremely rare that we would recommend an ETF without a 6-12 month track record. We want to understand some of the risk and volatility factors of the actual ETF and compare that to the backtested results.

3)      Understand the manager.  We dig deep to understand the manager or the shop behind the ETF and look at their track record.

4)      We look elsewhere to confirm our thoughts. Morningstar and can offer a lot of insight on new strategies.