Poorly timed fund trades have cost investors nearly $4 trillion over the past decade, according to new research from Morningstar.
In tracking the average dollar invested in nearly 23,000 U.S. open-end funds and exchange-traded funds, Morningstar found the average dollar invested in these funds earned 8.7 percent per year for the 10 years ended 2025—1.2 percentage points less than these funds’ 9.9 percent average annual total return over the same period.
This investor return gap, which is explained by the timing and magnitude of investors' purchases and sales of fund shares during the 10-year period, is equivalent to around 12 percent of the funds’ aggregate total return. It’s also substantial in dollar terms: Morningstar estimates the $29.7 trillion these funds held at the end of 2025 is about $3.8 trillion less than if these assets had remained untouched and compounded at 9.9 percent per year over the period.
In finding a relationship between the volatility of flows and gaps, Morningstar’s managing director Jeffrey Ptak thinks allocators may want to adopt a less-is-more approach to capture more alpha. “The less trading that allocators do, the more of their funds’ total returns they’re likely to capture,” Ptak explained to Institutional Investor over email.
Retail investors can also narrow this gap by using dollar-cost averaging or a systematic withdrawal plan, while institutions can hold fewer, diversified funds that hold hundreds of stocks. In some cases, investors can opt for strategies that automate routine tasks like rebalancing.
While Morningstar can’t pinpoint where the money flows, Ptak noted that the greater the return gap between what an investor sells and buys, the larger the potential divergence between dollar-weighted and total returns. If investors does this deftly, they could outpace their funds’ total returns. But if they end up chasing performance, wide gaps can emerge, such as moving to cash just as stocks are bottoming.
Ptak added that in some ways, the main takeaways from Morningstar’s research apply more to allocators than individuals, since institutions are less likely to invest in all-in-one strategies. Individuals have had greater success in these types of standalone vehicles than using the building blocks that institutional investors tend to prefer.
While institutions invest heavily in complex and illiquid private market assets, ETFs are gaining popularity among institutions, thanks to their low fees, strong liquidity, and operational efficiency. Research from Cerulli Associates found that asset owners nearly doubled their ETF usage over the past five years, with AUM reaching $337 billion in 2025. Nearly half of institutions using ETFs plan to up their allocations over the next two years.
Mack Kline, head of endowments, foundations and healthcare at J.P. Morgan Asset Management, is seeing more institutions allocate to ETFs — particularly active funds across equity and fixed income. "There's daily liquidity and pricing is attractive, even for non-profit institutions of significant scale that historically relied on separately managed accounts," Kline said.
Investors may be getting better at sitting still. Morningstar also estimates the average dollar invested in U.S. stock funds and ETFs gained 12.8 percent per year, just shy of the funds’ 13.3 percent aggregate average annual return over the 10-year period. This meant U.S. stock fund investors compounded more than $12 trillion in income and gains in total, “arguably the largest haul in any decade in fund history,” Ptak wrote.
