When Disclosure Isn't a Good Thing

REKENTHALER REPORT: Back histories, hot prospects and cold alternatives

John Rekenthaler 29 May, 2013 | 1:29PM
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If at first you don't succeed, invent another index. 

Last month, the regulator of fund marketing in the US, FINRA, approved the usage of backtested performance data for exchange-traded funds. As a result, ETFs may now publish the performance of the indices that their portfolios replicate for time periods that pre-existed their indices. In other words, ETF and index providers can tinker around with the rules for a proposed new index until that index shows fabulous pre-history results, then publish those performance numbers as if the index had existed at the time. 

This is nothing new. When S&P launched its MidCap 400 Index in the 1990s, it created a back history for the index that showed the performance of the MidCap 400 before it existed--quite the trick for an index that involves human judgement. When Research Affiliates launched its popular Fundamentally Based indices in the early 2000s, those indices were supported by journal articles that cited decades' worth of performance history. So, this sort of thing has been done before, many times and in many ways, without official FINRA approval. 

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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