ETF essentials · 2 minute read
Performance chasing: why can buying last year’s winner go wrong?
The short answer
Performance chasing means buying an ETF mainly because it recently performed well. It can lead investors into an expensive or crowded exposure just as market conditions begin to change.
Why it matters
Recent winners often attract attention after prices have already risen. Strong returns may reflect a temporary theme, falling interest rates, currency movements or a small group of companies.
None of those conditions is guaranteed to continue.
Performance tables also tend to highlight funds that survived and performed well. Closed or unsuccessful products receive less attention, which can make past success appear easier to identify than it was.
Past performance is useful evidence, but it should be used to understand behaviour, risk and tracking—not as a forecast.
A simple example
A technology ETF rises sharply over one year and moves to the top of a performance ranking. An investor buys because of that result.
If company expectations were already extremely high, even continued business growth may not prevent the ETF’s price from falling.
What to check
- Why did the ETF perform strongly?
- Have prices risen faster than company profits, or has the fund become more concentrated?
- Does the exposure fit a defined portfolio role?
- How did it behave over longer and more difficult periods?
- Are you buying an investment case or a recent chart?
Key term explained
Recency bias is the tendency to give too much importance to recent events when judging what may happen next.
A strong historical return is a reason to investigate the drivers, not proof that the same return will continue.