Morningstar: Investor Timing Cost 12% of Fund Returns Over Decade

Morningstar's latest Mind the Gap report puts a number on what many investors already suspect: the timing of their buys and sells cost them. Over the 10 years through Dec. 31, 2025, the average dollar invested in U.S. mutual funds and ETFs earned 8.7% annually. The funds themselves returned 9.9%. That gap of 1.2 percentage points a year compounds to roughly 12% of aggregate total returns lost to cash-flow timing, or about $3.8 trillion in dollar terms.

Jeffrey Ptak, managing director at Morningstar and the report's author, said the gap is consistent with prior editions. “There is a gap, and it’s consistent with the gap that we have estimated in previous reports, covering rolling 10-year periods,” Ptak said. He added that the experience varies by fund type. Allocation funds–target-risk and target-date funds that blend multiple asset classes–produced the smallest gaps. Investors in those funds saw an annual return gap of just 0.7%.

U.S. equity funds did even better on that metric, with a gap of only 0.4%. They also delivered the highest annual total returns of any category, at 13.3%. Morningstar called the decade the most profitable in U.S. stock fund history, with over $10 trillion in cumulative gains. The combination of size, stable flows and strong returns kept the timing penalty low.

At the other end of the spectrum, alternative funds posted the widest gap at 1.6% a year. Sector equity funds followed at 1.2%. Municipal bond funds, despite low total returns of 2.2% annually, still showed a gap of 1.1%.

Ptak was careful not to blame investors for the shortfall. Even routine rebalancing can create a timing effect. Allocation funds, by design, handle rebalancing internally and reduce the temptation to tinker. “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.

Buffer ETFs were a bright spot. Over three- and five-year periods ending Dec. 31, 2025, dollar-weighted returns in buffer ETFs actually exceeded aggregate total returns by 0.2% and 2.0%, respectively. Ptak called it a “nice success story.” Investors tended to buy at the start of the 12-month outcome period and hold to the end, which is exactly how the products are meant to be used.

Crypto ETFs told a different story. Investors in those funds saw a gap of roughly 14.0% a year, the widest of any category. Morningstar attributed the shortfall to poor timing–buying high and selling low, locking in losses.

Fund structure also mattered. ETF investors saw a higher annual return gap (1.6%) than open-end fund investors (1.2%), but they also earned higher aggregate total returns (11.2% vs. 9.6%). Active funds had a wider gap (1.6%) than index funds (1.1%), though the pattern reversed in some categories. U.S. equity index investors nearly matched their funds’ total returns, with a gap of just 0.1%.

“There’s no strong evidence of a link between management style–active or passive–and timing gaps,” the researchers wrote. “Rather, it appears that management style subordinates to other factors, such as how and where investors access and utilize a strategy.”

The report covered close to 23,000 U.S. open-end funds and ETFs with data back to Jan. 1, 2016. Ptak said the findings reinforce that simple, low-touch strategies tend to work best. The numbers back him up.