Past-Performance Warnings Fall on Deaf Ears for Buyers of ETFs

(Bloomberg) -- Investors are ignoring an all-too familiar warning splashed across the offering documents of exchange-traded funds: Past performance is not a guide to future results.

Historical returns are among the most important considerations for both U.S. and European investors when selecting an ETF, according to a new survey of 300 ETF users from Brown Brothers Harriman & Co. Performance tied with fund fees as investors’ chief concern, a shift from last year when management fees beat out all other variables.

It’s hardly surprising that performance is taking center stage for investors. U.S. stocks suffered their worst year in a decade in 2018, sinking many ETFs that track equity indexes. But greater scrutiny of returns could in fact be a positive -- if investors use their rear-view mirror to evaluate these products over multiple market cycles, according to Ryan Sullivan, vice president of Brown Brothers Harriman’s global ETF services.

“I appreciate the concern for investors that historical performance should not be indicative of future returns,” Sullivan said. But “I think it shows that investors are popping the hood and asking: how did this perform, how did it do last quarter at the end of 2018 when the market was all over the place?”

That’s potentially bad news for the many ETFs that are underperforming.

But Brown Brothers’ report also contains some good news for fund managers, namely that size doesn’t matter. About 40 percent of investors surveyed would consider funds managing less than $24 million -- a cohort that includes more than a quarter of U.S. ETFs.

--With assistance from Reade Pickert.

To contact the reporter on this story: Carolina Wilson in New York City at cwilson166@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Rachel Evans, Dave Liedtka

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