For years, index funds and ETFs have been sold as the holy grail of investing, low-cost, diversified, easy to buy, and nearly impossible to screw up.
Ask any financial advisor or scroll through investing Twitter (X), and you’ll hear the same mantra on repeat: “Just buy the S&P 500 and chill.” But a new report is throwing cold water on this narrative, and the findings may rattle even the most die-hard index fund evangelists.
Here’s the shocking truth: over the past decade, many investors in boring old mutual funds and even actively managed funds have actually earned more money than ETF and index fund investors.
Yes, you read that right. Higher fees and human fund managers sometimes left investors better off than those sticking to low-cost, do-nothing index funds.
It all boils down to one word: behavior.
Investors in mutual funds tended to “stick” with their investments longer, while ETF and index fund investors were far more likely to trade in and out. That trading, often driven by emotion and market headlines, ended up costing them dearly.
For example, actively managed taxable bond fund investors averaged 1.4% annual returns over the past decade. Indexed bond fund investors? Just 0.8%. The story repeats in municipal bonds and international stock funds, where active beat index, not because of magic stock-picking, but because investors were more patient.
And patience, it turns out, is priceless.
The real gut punch? The average U.S. fund investor lost about 1.2 percentage points of return per year simply due to bad timing; buying high and selling low.
That translates to around 15% of total returns evaporating every decade. Stretch that over 40 years of investing, and you’re giving up nearly half of your potential retirement nest egg. Imagine retiring with half the money you could have had, all because you couldn’t resist tinkering. Ouch.
This isn’t just about bonds. Investors also bungled international and sector stock funds, consistently chasing rallies late and dumping holdings after selloffs. The result was international fund investors earned 4.8% annually, versus the 5.9% they could have gotten just by sitting still.
In U.S. sector funds, investors made 7% instead of the 8.5% the funds themselves delivered. That’s the price of trying to outsmart the market.
To be fair, index funds still crush active funds on average. Lower fees mean that, mathematically, they win the zero-sum game over time.
But Morningstar’s report highlights the uncomfortable truth that average fund returns are not the same as average investor returns. Your behavior matters just as much as your portfolio’s expense ratio.
The obvious lesson is to stop market-timing. If you’re going to buy an index fund, treat it like a marriage, not a fling. The problem isn’t the fund, it is the temptation that comes with intraday trading and constant price-checking. ETFs, in particular, make it far too easy to act on fear and greed.
But here’s the twist most people miss: nobody knows which asset class will outperform in the next decade. U.S. large-cap stocks have been on fire since 2009, but history tells us booms always end.
The last time investors believed “all you need is the S&P 500,” in 1999–2000, it ended in disaster. Over the following decade, bonds and emerging markets crushed U.S. stocks. The future might rhyme.
The smarter move? Diversify across asset classes, keep costs low, and most importantly, sit on your hands. Don’t confuse activity with progress.
If you absolutely must trade, do the uncomfortable thing: buy when everyone else is panicking, and sell when everyone else is euphoric. That’s how you end up on the winning side of the trade.
