Strong recent performance can make an ETF appear particularly attractive.
When a fund has risen significantly over the previous year, investors may assume that its momentum will continue.
However, ETF performance rankings can change quickly, and the strongest performers in one period can become some of the weakest in the next.
That was evident in the InvestSMART 2026 ETF Scorecard, which found that five of the 10 best-performing ETFs from the previous year went on to record negative returns over the following 12 months. One fund that had gained more than 95% subsequently fell by almost 50%.
The figures highlight the risks of selecting an investment primarily on the basis of recent performance.
ETF risk can vary considerably
ETFs are sometimes viewed as relatively conservative investments because many track broad market indexes.
However, the ETF structure itself does not determine the level of risk.
A broad-market ETF may invest across hundreds or thousands of companies.
By contrast, a thematic ETF may focus on a relatively narrow area such as artificial intelligence, biotechnology, clean energy or semiconductors.
Other ETFs may use leverage or strategies designed to move inversely to a market.
These more specialised products can deliver very strong returns when conditions are favourable, but they can also experience substantial declines.
Strong performance can attract investors at the wrong time
Recent returns are highly visible and can influence investment decisions.
An ETF at the top of a performance table may appear more attractive than one that has recently underperformed.
However, past gains do not indicate whether an investment is attractively valued or whether the conditions behind that performance will continue.
In some cases, very strong performance can coincide with rising valuations and increasingly optimistic expectations.
If those expectations are not met, prices can fall sharply even if the long-term investment theme remains intact.
Thematic ETFs can be particularly volatile
Thematic ETFs can make this effect more pronounced.
A sector or investment theme can attract significant attention and capital when investor enthusiasm is high.
This can drive strong gains over a relatively short period.
However, thematic funds are often more concentrated than broad-market ETFs and may depend heavily on a relatively small number of companies or a single area of the economy.
As a result, returns can change quickly when market sentiment shifts.
A compelling long-term theme does not necessarily mean an ETF will continue to deliver strong returns at every point in the investment cycle.
Poor performers can also recover
The reverse can also occur.
The same Scorecard analysis found that six of the previous year’s 10 worst-performing ETFs subsequently returned to positive territory.
This does not mean investors should automatically buy funds that have recently performed poorly.
Rather, it demonstrates how quickly performance rankings can change as different sectors, markets and investment styles move in and out of favour.
A performance table shows what has already occurred. It does not provide a reliable indication of what will happen next.
Look beyond the performance table
Historical performance can still provide useful information.
It can help investors understand how an ETF has behaved under different market conditions and provide some indication of the volatility investors have experienced.
However, recent returns should be considered alongside other factors.
These may include:
- the ETF’s underlying holdings
- the level of diversification
- the investment strategy
- exposure to particular sectors or themes
- fees
- historical volatility
- the role the ETF would play within the broader portfolio
For share-based ETFs, understanding the companies behind the index can also provide useful context around the businesses and sectors driving returns.
It is also important to distinguish between broad-market ETFs designed to provide diversified market exposure and more specialised funds that may behave very differently.
Past performance is only one consideration
Performance data can be useful when comparing ETFs, but it should not be treated as a recommendation.
Buying an ETF solely because it has recently delivered strong returns assumes that the conditions behind those gains will continue.
They may not.
Markets change, valuations move and investor sentiment can shift rapidly.
For that reason, investors should consider what an ETF owns, why it has performed the way it has and how it fits within their broader investment strategy before relying on recent returns as a guide.
