In the latest edition of its annual look at dollar-weighted and time-weighted returns of over 25,000 individual U.S. open-end funds and ETFs, Morningstar found that investors continue to miss out on around 15% of aggregate total returns due to the timing and magnitude of their purchases and sales over a 10-year period.
Overall, Morningstar found that over the decade ended Dec. 31, 2024, the average dollar invested in funds and ETFs earned around 7.0% per year vs. the overall performance of 8.2% for those funds—a gap of 1.2 percentage points, a figure roughly in line with previous editions of the report.
“One of the things we try to underscore as a potential lesson is that it’s a persistent cost. People should approach that in a way that’s not unlike how they approach fund expense ratios,” said Jeffrey Ptak, a managing director at Morningstar and the report’s lead author. “You should be deliberate about the necessity, timing and nature of transactions and put yourself in a position where you do as little trading as possible. If that’s the case, you’re in a better position to capture as much of a fund’s returns as possible.”
Relatedly, the analysis found that funds in which investors are committed to staying for the long-term—such as target-date funds and other vehicles held in retirement plans—the gap between investor and fund performance is smaller. For example, investors in allocation funds posted 6.3% per year dollar-weighted return compared with 6.5% for the funds’ aggregate annual total return, capturing nearly 97% of the funds’ performance.
At the other end of the spectrum, taxable-bond and municipal-bond fund investors captured 1.2% returns out of 2.2% total returns—just slightly more than half.
Morningstar also added new wrinkles to this year’s report by gauging investor and fund performance relative to tracking errors (i.e., how funds that performed relative to benchmarks) and cash flow. The analysis found that investors in funds with larger tracking errors tended to have wider gaps than those in funds that hewed more closely to benchmarks. It also found that investors in funds with more volatile cashflows had bigger gaps than those in ones with more consistent flows.
“It’s the nature of investing that when a fund diverges in a notable way from the rest of the pack, if it works in your favor, you stick with it. However, if it goes the other way and you feel like that difference is working to your detriment, you may be more likely to sell that fund,” Ptak said. “That may hurt you because that shortfall you are seeing could be fleeting, and if the performance perks up, you miss out.”
Ptak did caution against overreading the findings. For example, variables like what funds are more likely to be included in retirement plans and target-date funds affect the analysis. By definition, those funds are disproportionately held for the long-term, and therefore, investors will capture more of the funds’ performance. Conversely, funds that are not typically held in those accounts and only used by individual retail investors (such as ETFs) have larger gaps.
“In many cases it’s about circumstances, settings and the context in which investors are doing their investing,” Ptak said. “It goes a long way to explaining outcomes. The focus ought to be on putting investors into settings where they are the likeliest to succeed.”
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