Chase ETF Winners & Flows At Your Own Peril

June 30, 2014

Trying to read ETF tea leaves with data is foolhardy.

It’s time for all the midyear ETF winner/loser stories. Here’s why you should take them with a mine’s worth of salt.

Human beings are for some reason hardwired to love keeping track of things. I don’t know where in the evolutionary process knowing whether Ooogla was doing better than Ook lodged in the human genome, but I admit I’m just as much a victim of the desire to keep score as anyone else.

And hey, it’s fun. How many people bring stat sheets to baseball games and keep the box score for themselves, even in the age of the Internet?

But when it comes to investing, keeping score can be a dangerous way to make decisions.

Consider our own midyear performance update at In it, we correctly point out that the iPath Dow Jones-UBS Coffee Total Return ETN (JO | B-94) was the best-performing ETF so far this year, with an eye-popping 62 percent return through last Thursday.

I get it. It’s interesting. But what I worry about is people trying to catch the tail end of rallies in tiny little niches—like coffee. Consider this chart on JO:


Source: Bloomberg

That’s what it looked like on April 22. If we’d written the story then, and you’d decided you had to get on this “coffee” thing before everyone switched to chai tea, here’s what you would have had to live with for the last two months:


Source: Bloomberg

Down 22%.

It’s easy to pick on the big winner, but we see a similar pattern time and time again. You don’t even have to cherry-pick. Let’s look at the best-performing sector last year—consumer cyclicals, and see how those ETFs have done year to date:


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