Investor Behaviour Gap: Dollars Earned 8.7%, Funds 9.9%

US mutual funds and exchange-traded funds (ETFs) earned 9.9% a year over the 10 years to 31 December 2025. The average dollar invested in them earned 8.7% a year.

That 1.2-point shortfall is the investor behaviour gap. It is the difference between a fund's return and the return its investors earned. A point here means one percentage point. The gap measures the effect of when and how much money moved in and out.

A fund's reported return assumes one lump sum went in on day one and stayed there. That is a time-weighted return. Money in a real fund moves in and out, so the return on the money differs.

The return on the money is the dollar-weighted return. It is the single yearly rate that turns the payments in and out into the final value. Dollars that sat in the fund through a big move count for more than dollars that did not.

An invented example shows the mechanism. A fund rises 20% in year one, then falls 10% in year two. Over the two years it gains 8.0%, which is 3.92% a year.

Investor A puts $100 in on day one and holds. A earns the fund's 3.92% a year.

Investor B also puts $100 in on day one, then adds $900 after the year-one rise. B's money stands at $1,020 at the end of year one. After the year-two fall it is worth $918 against $1,000 paid in. B lost 7.51% a year on the money, in the same fund that earned 3.92% a year.

The gap in that example is 11.43 points a year. It comes entirely from when the money arrived.

Morningstar measures the gap every year in its Mind the Gap study. The 2026 edition, published in August 2026, covers nearly 23,000 US open-end funds (mutual funds) and ETFs. It reports data to 31 December 2025.

For the 10 years to that date, the average dollar earned 8.7% a year against 9.9% for the funds. The 1.2-point gap equals about 12% of the funds' total return.

In dollars, the funds held $29.7 trillion at the end of 2025. Morningstar estimates the timing-related effects at around $3.8 trillion.

The overall figures leave out commodity and miscellaneous funds and funds of funds (funds that hold other funds). The study covers only funds that existed on 1 January 2016. Its figure describes the average dollar in that pool, not the average investor.

Chart 1 shows the gap for each of the five 10-year periods the report gives, ending in December of 2021 to 2025.

The gap fell from 1.7 points in 2021 and 2022 to 1.1 in 2023, then sat at 1.2 in 2024 and 2025.

The table gives the same 10-year figures by fund category. Investor return is what the average dollar earned. Fund return is the funds' total return.

Annual returns over the 10 years to 31 December 2025. Investor return is the dollar-weighted return of the average dollar. Fund return is the funds' total return. Overall excludes funds of funds, while the categories include them. Gaps are as Morningstar prints them, so they can differ from the difference of the rounded returns. Source: Morningstar, Mind the Gap 2026

US equity funds had the smallest gap, 0.4 points. Alternative funds had the largest, 1.6 points. Alternative is a Morningstar category group that includes non-traditional equity funds.

ETFs showed a wider gap than mutual funds. The average ETF dollar earned 9.5% a year against 11.2% for the ETFs, a gap of 1.6 points. Mutual funds showed 8.5% against 9.6%, a gap of 1.2 points.

The gap also varied with volatility, the size of a fund's swings. Morningstar ranks funds by standard deviation, the usual measure of how widely returns scatter. Our explainer on standard deviation in investing covers it. Chart 2 shows five groups of funds ranked on that measure.

The least volatile fifth had a gap of 0.4 points. The most volatile fifth had a gap of 2.1 points. The three groups between them sat at 1.5, 1.8 and 1.3 points, so the steps do not rise evenly.

Yes, it can. Morningstar's report says regular saving from a pay cheque can open a gap. It names regular rebalancing (selling what has risen to buy what has fallen) as another practice that can.

We tested the first of those practices directly. Our saver pays $100 into SPY (the S&P 500 ETF) on the last trading day of every month, with no timing decision.

Each window holds 120 payments over 10 years, ending in December. We ran 11 windows, ending each December from 2015 to 2025. SPY's return counts dividends.

For each window we subtracted SPY's own yearly return over the same 10 years from the saver's yearly return on the money. Chart 3 shows that difference. A bar to the right of zero means the saver finished ahead of SPY.

The saver finished ahead of SPY in 9 of the 11 windows and behind in 2. The difference was never zero. It ran from 2.01 points behind, in the window ending December 2022, to 5.39 points ahead, in the window ending December 2017.

The December 2017 window starts in December 2007, so its payments run through the 2008 and 2009 lows. The window to December 2025 runs from 31 December 2015 to 31 December 2025. The saver earned 15.42% a year there against 14.72% for SPY, which is 0.70 points ahead.

Steady saving can leave the saver ahead of or behind the fund. In the window to December 2025 it left the saver ahead.

Morningstar's investors finished 1.2 points behind. In SPY over the same dates, steady saving left the saver ahead, not behind. The data does not split the 1.2 points by cause.

The gap has an academic record. A 2007 study by Ilia Dichev in the American Economic Review measured actual investor returns against buy-and-hold returns in stock markets. Its abstract concludes that actual investor returns are systematically lower than buy-and-hold returns for nearly all major international stock markets.

Dichev's finding has the same sign as Morningstar's, for different assets: whole stock markets, not funds.

The gap does not price any single decision. It covers every purchase and sale in a pool of funds.

Our test has limits of its own. It covers one fund, SPY, with payments on month-end closes and no costs or taxes. It tests steady payments only, so it says nothing about investors who time their purchases.

Neither result is a forecast.

For the wider study of how investors' own decisions shape results, see our guide to behavioural finance. Our pieces on loss aversion and time in the market cover two of its themes. For monthly payments against a lump sum, see our comparison of dollar-cost averaging and lump sums.

The average dollar in US funds and ETFs earned 1.2 points a year less than the funds did over the 10 years to December 2025. That is the investor behaviour gap. The data shows its size, not its cause.

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This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

Investors earn less than their funds when more of their money arrives ahead of falls than ahead of rises. Their return depends on when each dollar went in, while a fund's reported return assumes one lump sum on day one. Morningstar found a 1.2-point yearly shortfall across US funds and ETFs in the 10 years to December 2025.

A time-weighted return ignores payments. A dollar-weighted return counts them, as the single yearly rate that turns every payment into the final value. A fund reports the first, while the investor earns the second. In our invented example the fund earned 3.92% a year, but an investor who added money after the rise lost 7.51% a year.

In the 10 years to December 2025, Morningstar found a gap of 1.2 points. The average dollar in US funds and ETFs earned 8.7% a year, while the funds earned 9.9%. The gap was 0.4 points in US equity funds and 1.6 points in alternative funds. Our own test of steady saving into SPY produced gaps of both signs.

Saving a fixed amount every month can leave you ahead of or behind the fund. In a test of $100 a month into SPY over 11 ten-year periods, the saver finished ahead in 9 and behind in 2. Our comparison of dollar-cost averaging and lump sums covers the trade-off.

DISCLAIMER: This article is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.