Performance puzzles

While past performance of funds is not a guarantee of future returns, how funds performed remains a key metric when contrasting funds. It is easy to say "just buy the one with better performance". But, talking purely about performance and risk and other considerations being equal, if one wants to score/rank the fund with the better performance higher, we still need to decide which performance we are talking about. Is it over the whole history where the funds being contrasted existed? Is it the recent performance? The 5 years? 20 years? If we want several horizons, how do we blend and translate these into a decision?

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A subtle example

To illustrate, consider the two giant tech ETFs, VGT (Vanguard Information Technology Index ETF) and XLK (SPDR Technology Select Sector ETF). Both track the performance of the technology sector, although each with a different index. Their fees are both 0.1% and they have been around for ~20 and ~25 years respectively.

So which "performed better"? The table below shows that XLK has done better recently (5 years), but VGT did better over the longer term (15 years). Here, the "better return" is clearly a subject of how one wants to look at things. Does one value strong long term performance over a recent outperformance when contrasting funds?

The chart below may illustrate this point better than the above table of returns of arbitrary years. It is important to gain this intuition before scoring and ranking across multiple funds.

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A subtle differentiation

The above example is of two funds that are very similar, both following passive indices and tracking the performance of the tech sector well. In this case, the differences between recent returns and overall returns are not very pronounced. Despite this, skewing one way or another can dictate which "performed better" and offer a very subtle and precise way of scoring and distinguishing the two. Of course, often the differences are even more pronounced, which makes the distinction even clearer. Furthermore, the same question also arises when working on portfolio optimization and contrasting two or more portfolio performances.

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DAYOSS does all this automatically

DAYOSS incorporates the above and multiple performance information into a single number, the reward score. As an investor, this saves you time and facilitates effortless contrasting between funds. Moreover the system will adopt your reward preferences and work with them as it optimizes other factors for you.

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