Backtesting Guide
How to Backtest an ETF Portfolio
Backtesting shows you how a hypothetical portfolio would have performed using historical data. This is an educational tool for understanding market history.
Important: Past performance is not a reliable indicator of future performance. Backtesting is educational only and does not constitute financial advice. Consider seeking professional advice before making investment decisions.
What is backtesting?
Backtesting is the process of testing an investment strategy against historical data to see how it would have performed. Instead of waiting years to see results, you can analyze decades of past performance in seconds.
For ETF investors, backtesting answers questions like:
- How would my portfolio have performed during the 2020 COVID crash?
- Would VAS or A200 have given me better returns over 5 years?
- How much difference does international diversification actually make?
- What's the real impact of management fees over time?
Important caveat: Past performance doesn't guarantee future results. Backtesting is a learning tool, not a crystal ball. Use it to understand historical patterns, not to predict what will happen next.
Popular ASX ETFs for backtesting
These are the most commonly backtested Australian ETFs on PaperWealth:
VAS
Vanguard Australian Shares
Tracks the ASX 300 index. Broad exposure to Australian companies across all sectors.
A200
BetaShares Australia 200
Tracks the ASX 200 index. Similar to VAS but with lower management fees.
VDHG
Vanguard Diversified High Growth
All-in-one fund with 90% growth assets. Includes Australian, international, and emerging markets.
VGS
Vanguard MSCI International
Developed world ex-Australia exposure. Over 1,500 companies from US, Europe, and Asia.
VHY
Vanguard High Yield
High dividend-yielding Australian shares. Income-focused strategy.
How to run a backtest on PaperWealth
Choose your ETFs
Select up to 5 ETFs for your portfolio. Popular choices include VAS, A200, VDHG, VGS, and VHY. You can mix Australian and international exposure.
Set your allocation
Decide what percentage of your portfolio goes to each ETF. For example, 60% VAS and 40% VGS for a classic Australian/international split.
Pick your timeframe
Choose 1, 2, 3, or 5 years of historical data. Longer periods show how the portfolio handles different market conditions.
Enter starting amount
Set your initial investment amount. You can also add regular contributions to simulate dollar-cost averaging.
Analyze results
View your portfolio's historical performance, total returns, and comparison against the ASX 200 benchmark. Adjust and re-run to compare different strategies.
Example allocations for demonstration
These are hypothetical examples to demonstrate how the backtester works. They are not recommendations or advice about how to invest.
Example: Australian + International
VAS 60% + VGS 40%
A hypothetical allocation combining Australian and international exposure. For demonstration purposes only.
Run backtest →
Example: Single diversified fund
VDHG 100%
A hypothetical single-fund allocation. VDHG is a diversified ETF. For demonstration purposes only.
Run backtest →
Example: Higher yield focus
VHY 50% + VAS 50%
A hypothetical allocation with dividend-focused ETF. For demonstration purposes only.
Run backtest →
Example: Low-cost broad market
A200 100%
A hypothetical single-ETF allocation. A200 is a low-cost index fund. For demonstration purposes only.
Run backtest →
Understanding backtest results
Total return
The percentage gain or loss from your starting amount. A 50% total return on $10,000 means your portfolio would have grown to $15,000.
Annualized return
The average yearly return. This normalizes performance across different time periods, making it easier to compare 3-year vs 10-year backtests.
Benchmark comparison
PaperWealth compares your portfolio to the ASX 200 index. This shows whether your strategy outperformed or underperformed the broader market.
Maximum drawdown
The largest peak-to-trough decline during the period. Important for understanding worst-case scenarios and how much volatility you'd need to stomach.
Common backtesting mistakes
Cherry-picking timeframes
Any strategy looks great if you pick the right start and end dates. Test across multiple periods including crashes and recoveries.
Ignoring fees
Management fees compound over time. A 0.20% difference in MER can significantly impact long-term returns.
Confusing correlation with causation
Just because a strategy worked doesn't mean it will continue. Markets change, and past outperformance often reverts to the mean.
Over-optimizing
Tweaking allocations to perfectly match past data is called "curve fitting." A simpler strategy often performs better in real conditions.
Ready to backtest your portfolio?
Sign up to access the ETF backtester. Compare VAS, A200, VDHG and other Australian ETFs with a 7-day free trial.