Please stay tuned for important disclosure information at the conclusion of this episode.

Welcome to Investing Insights. I'm your host, Margaret Giles, filling in for Ivana Hampton.

Over the last 10 years, the average dollar invested in U.S. mutual funds and ETFs earned 1.2% less per year

than what those funds returned during the same period. That's the top line finding in this

year's Mind the Gap study, which aims to address the question of where investors succeeded

in capturing most of their funds returns and where they fell short. Jeff Battack, the lead researcher on this

study, is here to break down the takeaways from the report and what investors can do if they want to

avoid leaving money on the table. Jeff is managing director of research and investments for Morningstar

Research Services. All right, Jeff, thanks for being here. Oh, gosh, my pleasure. Thanks for having me.

All right, before we get into the actual findings of this study, I want to make sure we know how you got there. So can you explain how you measure the difference between investor returns and total returns or the mind-the-gap study? Absolutely, yeah. So maybe we'll start with total returns just because I think it's going to be more familiar to a lot of your viewers and listeners. Total returns are the familiar return that

you would find on Morningstar.com and in the funds filings. You know, it's kind of the language of

fund performance, so to speak. And what that assumes is an initial lump sum purchase. So you take your money, you plop it down on day one, you hold it to the end. That's a total return. An investor return, which is proprietary to us. It's something that we came back. It's akin to an internal rate of return. And the key difference between it and a total return is it does not assume you're plopping down that lump sum at the beginning.

It's actually taking into account the timing and magnitude of cash flows that come and go to and from an investment over time.

And so that way it helps us to approximate the return of the average dollar that's been invested in the fund.

And that's a key difference.

It yields some insights into what the experience in dollar terms has been for investors as opposed to the total return, which makes an assumption that you're going to plop down that money on day one and hold it to the end, which we know is not reality for a lot of us. Absolutely. And what's the timeframe you're looking at for the study? We're looking at a 10-year time period, so the most recent study focus on the 10 years end of December 31st, 2024.

Okay. So how does the latest research compare to previous years? Is the quote-unquote gap going away, or is it here to stay?

The gap will not go away. It persists. Yeah. So we found that the gap between investors, aggregate investor return and the total return of the funds that they held was 1.2% per year, which is, it doesn't sound like a lot, but that's a pretty sizable number when you consider the fact that it's around, it's equivalent to around 15% of the aggregate total

return that all of those funds earned over time. And so it's something that we want to continue

paying attention to. It's one of the reasons why we've continued to conduct the study

through all of these years. Right. So this difference in investor returns and total returns

isn't just coming from investors who are trying and failing to time the market.

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