Volatility, not fees, drives the investor gap

Morningstar's latest Mind the Gap research puts a number on the cost of bad timing: over the decade ended December 31, 2025, investors in U.S. mutual funds and ETFs earned an average annual return of 8.7%, while the funds themselves returned 9.9%. That 1.2-percentage-point gap, spread across the roughly $13.6 trillion the study covers, amounts to nearly $3.8 trillion in foregone wealth.

The gap is not evenly distributed. Investors in U.S. stock funds captured 12.8% annually versus the funds' 13.3%, a narrow spread that suggests broad equity exposure is a behavior clients can stick with; allocation-oriented strategies also tend to produce narrow gaps because they strip out the individual buy-and-sell decisions that get investors into trouble.

Large price swings give investors more chances to second-guess themselves, and the data follow: the least-volatile funds had an investor return gap of -0.4% versus -2.1% for the most volatile, while the cheapest fund quintile posted a -1.0% gap and the most expensive a -1.2% gap. The 0.2-point fee spread is dwarfed by the 1.7-point volatility spread, which suggests the industry's long focus on expense ratios is aimed at the wrong lever.

Morningstar's advice is to evaluate cost and risk together, and to ask whether a client can realistically stay invested through a strategy's drawdowns. That question applies to product design as much as to portfolio construction, and the data suggests the convenience that makes ETFs easy to buy also makes them easy to sell at the wrong moment.

A strategy that helps a client stay in their seat is worth more than any fee reduction the industry can engineer: the fee lever moves the gap by 0.2 points.