Chasing Performance With ETFs

Chasing Performance With ETFs by Chris Brightman, Feifei Li and Xi Liu, Research Affiliates

Key Points

1. It is well established that many investors tend to purchase “winning” stocks—those that have recently outperformed—and to shun “losers.”
2. ETF providers evidently take investors’ preference for winners into account by predominately launching funds whose underlying indices are outperforming at the time they make new product decisions.
3. Strategies that produced excess returns over the prior three years generally behaved like an average investor’s portfolio after the ETFs were launched

Adventurous people who love riding in the gondola of a hot-air balloon would naturally detest plummeting to earth. Similarly, many investors have a pronounced tendency to channel funds to managers, strategies, and stocks with superior short-term returns, while...