Investors lose out on 15% of mutual fund, ETF returns, researchers say
To find out how well a mutual fund or exchange-traded fund has performed over a particular period, you usually look at total return.
This number is based on several assumptions. That is, you put some money into the fund and let the fund sit there the entire time, periodically reinvesting any dividends that may have arrived.
Of course, real people don’t invest like this. After you buy a fund, you may have to add a few more stocks if the fund gets hot. Or maybe sell a piece if you find another investment you like better.
So even if you hold a fund for ten years, the 10-year return you see on your portfolio page is unlikely to match the official return on the fund’s website. On average, investors’ returns are lower than the returns on the funds they own.
Over the 10 years ending December 2024, the average dollar invested in U.S. mutual funds and ETFs returned 7% annually, according to Morningstar’s 2025 report.Mind the Gap” study. During the same period, these funds returned an average of 8.2%.
In other words, investors lost about 15% of their returns during the decade the researchers analyzed.
This 1.2 percentage point difference is what Morningstar researchers call the “investor return gap.” This can be attributed to investor behavior in general, says Jeffrey Ptak, managing director of Morningstar Research Services.
“It would literally be buying high and selling low,” Ptak says.
How can you narrow your performance gap?
Ptak says the most obvious examples of investors’ self-destructive behavior occur when the market is at extremes; Overexuberant investors flock to the market when stocks are already up and panic when the market starts to skid.
But the type of behavior that leads to poor performance in the long run “may be much more mundane than that,” he says. It may be a coincidence of timing that you buy a fund before some of its holdings decline in value. Or maybe you sell it to raise money for something else and the fund rises.
Morningstar’s data isn’t a perfect road map for maximizing the returns you get from the funds you own, but it does highlight a few possible strategies for potentially keeping more of the money your funds earn. But remember: Experts recommend talking to a financial professional before making any major changes to your investment strategy.
Avoid taking too many risks
As a rule, investments with a higher level of risk also provide higher returns. Among professional investors, this is called the risk “premium.” But if If you have a highly volatile fund in your portfolio, data shows that you are less likely to realize that fund’s full potential.
“It is more difficult for investors to be successful with more volatile funds than with less volatile funds,” Ptak says. “And this was true even when we controlled for fund type.”
Across all mutual fund and ETF types, investors in the funds’ least volatile quintile experienced a 0.4% difference in returns, while the most volatile funds experienced a 2% difference.
Ptak says it’s impossible to come to a definitive conclusion as to why this happens, but it’s not hard to believe financial psychology plays a role. In theory, the better a fund performs, the more likely investors are to panic and sell when things get bad.
“Someone might be following the theory and thinking: I’m going to invest [riskier assets] “This gives you a premium return,” Ptak says. “That’s all well and good, but if you can’t hold out, you won’t get any risk premium. On the contrary, you’ll probably end up with a gap.”
Invest consciously
Morningstar’s data tends to support the idea that investors who take a hands-off, buy-and-hold approach generally have a smaller gap than those who trade more frequently.
Case in point: Among the different types of funds the researchers analyzed, allocation funds, largely composed of target date funds, generated the lowest investor shortfall, on average; only 0.1 percentage points.
The small difference likely comes down to how these funds, which are designed to grow more conservatively as you age, are commonly held: in long-term retirement accounts.
Ptak says the best way to keep your investment gap narrow is to invest in a diversified portfolio and automate your trading as much as possible to avoid discretionary or emotional trading.
“Less is more,” he says. “The less action you have to take, the better off you will be.”
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