Over the past decade, US mutual funds and exchange-traded funds earned an average of 7.0% per year for investors, lower than the funds’ aggregate total return of 8.2%. The persistent gap of 1.2 percentage points per year reflects timing and magnitude of transactions.

Investors in sector equity funds had the largest gap between their 7.0% average annual return and the funds’ 8.5% total return. On the other hand, investors in allocation funds captured nearly 97% of their funds’ 6.5% total return.

Funds with more volatile cash flows resulted in lower dollar-weighted returns for investors compared to those with stable cash flows. The importance of minimizing discretionary trades and automating routine tasks like rebalancing is highlighted.

Funds with higher tracking error from their benchmarks showed wider gaps between investor and total returns. While active funds with unique approaches can be appealing, they may lead to mistimed trades and wider return gaps for investors.

Investors faced challenges with capturing total returns in more volatile funds, which led to larger gaps in investor returns. Caution is advised when dealing with volatile strategies to avoid performance chasing and mistimed trades.

Read more at Morningstar: The More Investors Traded, the Worse They Performed