If there's one thing that Wall Street is good at, it's rolling out new products - like new ETFs - that are supported by reams of back-tested data. Assuming that markets in the future continue to behave the same way that they have in the past, hypothetical returns earned in the past will continue to be earned in the future. In practice, though, how useful is this back-tested data?

To answer this question, ETF Trends looks at three new ETFs based on customized indexes that appear to outperform the market based on hypothetical returns and back-tested data going back 10 years. ETF Trends points out that using back-tested data can be useful, but should be used with caution:

"Remember, a back-test is just one tool used in evaluating a strategy. Keep in mind that hypothetical results are meaningless unless third-party researchers are going to validate findings. And while having some kind of a track record is helpful, it's extremely important to remember that the past is not indicative of the future."

What do you think: To what extent is past "hypothetical" performance an indicator of future performance?

NOTE: Please keep in mind that TradeKing does not specifically endorse any of the securities or trading strategies mentioned. Depending on your risk-reward profile, this trade may or may not be suitable for your portfolio. The stocks mentioned are for educational purposes only.

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Experience, or backtested data in this case, shows us where we went right or wrong based on the factors of the time. This is no guarantee that these same factors will exist when it comes to decision time in the future. However, there maybe some more general lessons that we can learn from experience that we cannot learn from a locked in position like an ETF. Experience can tell you, "get out now", whereas with these locked in positions, you may not have that option once you are in. Or at least you may not have the flexibility to act as quickly as you would like and could in a more general way with experience.

Lessons learned while valuable, are only valuable if you can execute quickly based on the knowledge. I fear any financial vehicle based on backtested data would be too slow to sufficiently protect ME personally.

As an example, you touched a hot stove as a child and burned your hand. As a result you learned that it hurt a lot and also more importantly that if the element is red, it will be hot and if you touch it again you will burn yourself again. Fast forward 10 years and there is a new stove that no longer burns red, but rather there is a light to say the element is on. You've never heard of this light before and based on your past experience see the element is not red so you touch it. (don't ask me why...just an example...lol) Now you went and burned yourself again and you wondered why your past experience didn't prevent you from burning yourself.

The reason is that things change. So the experiences of the past are only guides and that what may have been true or a good indicator in the past is no longer or at least may be different. One only needs to look at the medical industry and all it's studies to prove this fact. Sometime next week a study that was started 5 years ago and ended 2 years ago and published this month is going to tell us that something is bad for us. However right behind it is a study that started 3 years ago and ended last year and published yesterday that the same thing is actually good for us?

Historical data is just that HISTORY...Backtested data is only a rough guideline to what might happen based on factors that may no longer be present temporarily or otherwise. Just another tool that should be verified with actual information and current research.

in real life-you cannot - drive Italian style - throw away rear view mirror

I think the most important thing to remember is that applying money to a strategy based on backtested data is going to change the relationship of the dataset if any scale is applied. This is George Soros' idea of reflexivity - that market participants have an effect on the outcome - but without getting too philosophical, just be wary of anything based on historical correlations or patterns... financial markets have the odd tendecy to suffer through "25 sigma/10,000 year" events a couple times each decade.