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by Finage at February 13, 2023 4 MIN READ


Forward-looking Funds Vs. Backward-looking ETFs


When it comes to business, the investment strategy you use can ultimately decide your level of success. Interestingly enough some of these tactics will only work for certain situations which is why comparing them is important. Two such tactics are the use of forward-looking funds and backward-looking ETFs.


Understanding, either investment philosophy, as well as its risks and potential rewards, will guide you in finding what works. This will also be accompanied by some of the actual examples of both in the real world.


- The concept of forward-looking

- Pros and cons

- The backward-looking version

- Pros and cons

- The matchup between the two

- Final thoughts


The concept of forward-looking

Forward-looking is a tactic employed by investors when they need to take a chance on some stock based on what the company is likely to do. They will typically wait for announcements from said companies, which often come with some predictions.


As you would imagine, nothing is certain in the realm of business and that’s exactly the case for predictions, which are probable but not set in stone. The concept of forward-looking trading involves predicting future market trends and making investment decisions, following important strategies and tips. This is why companies that issue such predictions will often put disclaimers out there, to avoid legal consequences.


Funding investments in this fashion or any for that matter will require the use of Key Performance Indicators (KPIs) to make the proper assessments; some of these include:

- projected revenue 

- likely personnel changes

- projected customer base

- number of projects in development

- the success rate in percentages


The above is a competent way of going about risk management, which is why investors of any quality fall back on them so much. The data they provide is truly invaluable, if not always an accurate portrayal of what is to come.


Pros and cons

In a way, the strengths and weaknesses of forward-looking funds and investing as a whole have to do with the positive backing from companies. On one hand, the predictions made are usually educated guesses that are likely to happen. If that is the case, investing in them could yield good returns. The same positive attitude you have going into it also encourages portfolio diversification.


On the flip side, the opposite could be true or the chaotic nature of the business world will catch up to stocks, forcing them to shift overnight. As such, the expectations won’t be met, resulting in disappointment.


The backward-looking version

The approach to trading Exchange Traded Funds (ETFs) and regular investment through the use of backward-looking funds is also called upon. This entails that you look at a company’s past to assess its future.


This retrospective viewpoint allows investors to make their predictions by using past information and seeing how things went in particular cases. As opposed to the announcements and predictions that companies present, you can use whatever metrics to form your own opinion.


From it, you’ll decide if the investment is worth the trouble. The most common of these KPIs mirror those used in front-looking, only that they’re focused on the past, both distant and recent.


Pros and cons 

This tactic mainly has more of a negative outlook on things and focuses on what not to do. The use of hindsight, however, allows you to avoid any possible pitfalls that other investors succumbed to. It also allows you to look at what did work and simply follow that.


Unfortunately, any information that looks discouraging in any way may influence some participants, convincing them that the investments are likely to fail. As a result, they may not even take a chance, which may end up paying off because of the turbulent nature of the financial world.


The matchup between the two 

Now that we have a proper idea of what either method represents as well as its implications for investors, we can get into how they match up against each other. The first obvious difference between the two is the point of view taken by the investor which is often optimistic for front-looking and somewhat pessimistic for back-looking. This is also based on the sources from which they come, with the former being in the form of company announcements and the latter being on the investor’s look at records.


The ultimate difference between the two takes the form of how investors not only look at but respond to the information and/or predictions provided. Back-looking, for example, only uses the information to ensure that lessons from the past are learned, but without much initiative about what to do about it besides that. 


Front-looking almost omits the past in favor of the future, which doesn’t always look good, but it does give investors ideas on what to do with past information. All this shows is that neither is better, but rather, they should be used together.


Final thoughts

Now that we know that both are useful in their own right, but work better together, you as an investor can finally add the knowledge to your catalog. As far as the future outlook for investors using either or both methods, it can make things easier (if other tactics such as the use of bots are implemented).


That said as with all financial aspects, you can only make educated guesses from the tonnes of available data. You can find reliable data and a diversified cost-effective way to invest in the stock market by using services of ETFs and financial statements real-time and historical data provider company. The nature of the beast is always going to be impossible to predict and it may even depend on the type of stock you are buying and what affects its movements.

You can get your ETFs Market Data with Finage free API key.

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