In the 2026 edition of its annual Mind the Gap report, Morningstar found that investors have missed out on approximately 12% of aggregate total returns over the past 10 years on U.S. mutual funds and ETFs due to the timing and size of investor cash flows.
The study looked at close to 23,000 individual U.S. open-ended funds and ETFs that have existed since Jan. 1, 2016. In dollar terms, investors’ timing-related return losses amounted to about $3.8 trillion over a decade.
Overall, the average dollar invested in these funds earned 8.7% per year between Jan. 1, 2016 and Dec. 31, 2025, according to Morningstar. The funds themselves earned a total return of 9.9% per year over the same period.
“There is a gap, and it’s consistent with the gap that we have estimated in previous reports, covering rolling 10-year periods,” said Jeffrey Ptak, managing director at Morningstar and the report’s author. “The second thing I would note is that there were differences in the experiences that investors had that could depend on the type of fund, or other factors. One of the things we have observed in this installment is that investors have tended to enjoy greater success with allocation funds—things like target risk funds, target date funds that are often funds and [combine] exposure to multiple asset classes in a single fund. We found that in those types of funds, investors had smaller gaps.”
Ptak and the other Morningstar researchers working on the report were careful to point out that the gap between investor returns and fund returns doesn’t necessarily mean impulse decisions or bad timing on the investors’ part are to blame. Even widely accepted practices such as rebalancing can lead to this effect. The fact that allocation funds don’t require manual rebalancing and, being commingled, don’t create as much of a temptation to tinker with them to maximize returns likely works in investors’ favor, Ptak noted.
Investors in U.S. equity and allocation funds experienced the lowest annual return gap over the past 10 years, at 0.4% and 0.7%, respectively. Investors in alternative funds and sector equity funds saw the highest annual return gaps, at 1.6% and 1.2%, respectively. U.S. equity funds also delivered the highest annual total returns overall, at 13.3%. Municipal bond funds delivered the lowest annual total returns, at 2.2%, with an investor return gap of 1.1%.
U.S. equity funds might just have had the most profitable decade in their history, according to Morningstar, with over $10 trillion in cumulative gains. This was due to a confluence of factors, including the category’s sheer size, stable cash flows and the stellar returns U.S. stock funds experienced over the last 10 years.
“This year’s study adds to evidence that investors have tended to fare better with relatively simple, stand-alone options like allocation funds or portfolio bulwarks like US stock funds, where we saw narrower timing gaps,” Morningstar researchers wrote.
Morningstar also examined the performance of some of the new ETF types that have emerged in recent years, including buffer and crypto funds. The firm looked at the three- and five-year performance periods for buffer ETFs and the one-year performance period for crypto ETFs, all ending on Dec. 31, 2025. It found that buffer ETFs’ dollar-weighted returns exceeded their aggregate total returns during the tracking period, by about 0.2% over the three-year period and 2.0% over the five-year period.
“Buffer ETFs are looking like a nice success story,” said Ptak. “It’s early days yet, but I think it is encouraging to see investors using those in the way they are intended to be used, which is to invest at the beginning of the investing period and hold it to the end.”
In part, investors in buffer ETFs benefited from inflows clustering around specified months tied to the funds’ outcome periods beginning and ending. Most buffer ETFs have a defined outcome period lasting 12 months.
Crypto ETFs, on the other hand, fared much worse, with a gap of approximately 14.0% between investors’ annual returns and the fund returns. This was largely due to poor timing on investor purchases and sales, according to the researchers, with many buying high and selling low, locking in their losses.
When it came to fund structure, ETF investors saw a higher annual return gap of 1.6% than investors in open-end funds (1.2%), but also higher aggregate total returns of 11.2% vs. 9.6% for open-end funds. Investors in active funds saw an overall higher annual return gap, at 1.6%, than index fund investors, at 1.1%. While active funds had smaller return gaps in most fund categories, investors in index funds focused on U.S. equities ended up nearly matching their funds’ total returns, with a gap of only 0.1%.
“There’s no strong evidence of a link between management style—active or passive—and timing gaps,” Morningstar researchers wrote. “Rather, it appears that management style subordinates to other factors, such as how and where investors access and utilize a strategy.”