Chasing Fund Stars Costs Investors 1.2 Points Annually

The average dollar in US funds earned 8.7 percent annually over the past decade, trailing the funds' 9.9 percent aggregate return by 1.2 percentage points a year — roughly 12 percent of returns lost to mistimed trades.

"The gap is not due to the funds' performance; it reflects the timing and size of investors' purchases and sales," said Jeffrey Ptak, chief ratings officer at Morningstar and author of the firm's Mind the Gap study.

US stock fund investors fared far better, capturing 12.8 percent annual returns versus the funds' 13.3 percent aggregate — nearly all available gains. Crypto ETF investors stumbled badly, losing 5.8 percent per year on their dollars while the ETFs themselves returned 8.5 percent annually from January 2024 through June 2026, a gap exceeding 14 percentage points.

The pattern traces to a behavioral loop: investors pile into funds after strong performance and redeem after drawdowns, locking in losses. Morningstar's data shows the most volatile fund categories produce the widest gaps, while allocation funds — which automate rebalancing — capture nearly all of their returns.

The psychology behind this behavior is well documented. Investors chase "shooting stars" — fund managers with eye-catching recent returns — even though past performance is a weak predictor of future results. Spencer Jakab, a columnist at the Wall Street Journal, wrote last week about why investors forgive fallen investing stars; the companion question is why they fall for these stars in the first place.

Morningstar's Active/Passive Barometer, released this month, found that just over 40 percent of active funds survived and beat their average passive peer over the 12 months through June 2026, up 7 percentage points from a year earlier. An investor selecting an active manager at random faces a 60 percent probability of underperformance. The distribution is even more lopsided in certain categories: in US large-growth funds — a popular destination given the rise of semiconductor and AI stocks — the 10-year success rate for active managers was just 5 percent, and the excess return distribution skews heavily negative.

The gap has persisted across recent measurement periods. Morningstar's estimates for the 10-year windows ended Dec. 31, 2021 through 2024 produced similar shortfalls, suggesting the behavior is structural rather than a one-off anomaly. The consistency of the pattern — investors systematically underperforming the funds they own — points to a durable behavioral bias rather than a market regime effect.

The 14-Point Crypto Gap

The Mind the Gap study quantifies the damage across asset classes. The 1.2-percentage-point annual gap across all US funds translates to roughly 12 percent of the funds' aggregate return being lost to investor timing decisions. For crypto ETFs, the damage was far worse: investors lost 5.8 percent per year on their dollars while the underlying ETFs gained 8.5 percent annually. The biggest inflows came after bitcoin had already streaked higher in 2024's first quarter and again in the first half of 2025, followed by redemptions during the recent downturn — effectively buying high and selling low.

Automation and Low Fees Win

The data points to a clear remedy. Allocation funds, including target-date funds, captured a larger share of their funds' returns than any other category except US equity. These strategies handle rebalancing and asset-mix adjustments automatically, and because they're often embedded in retirement plans, investors contribute to them systematically. Low-cost active funds also improve the odds: across 16 of 20 categories, choosing an active manager in the lowest fee quintile improved the probability of outperformance, and in categories like US real estate and intermediate core bond, low-cost active funds beat passive peers more than half the time.

The lesson for investors is straightforward: hold fewer, more diversified funds, automate contributions, and resist the urge to trade on recent performance. The 1.2-point annual gap compounds into a substantial wealth difference over a decade — one that no amount of star-gazing can recover. For the roughly $29 trillion in US fund assets tracked by Morningstar's Active/Passive Barometer, even a fraction of a percentage point of improved investor behavior translates into billions of dollars in preserved wealth.

This article is for informational purposes only and does not constitute investment advice.