The More Stock Fund Investors Traded, the More It Cost Them

You’ve heard of something for nothing. How about nothing for something? That’s the proposition some fund investors have signed up for by trading a lot, leaving themselves worse off in the process.

Let me back up for a second: We don’t precisely know how much fund investors are trading in any given fund, as that information isn’t broken out. However, we do possess data on how those trading decisions net out in aggregate—for example, funds’ net asset flows. As such, we can use the volatility of monthly flows to proxy how much trading investors have done.

Accordingly, I derived that monthly flow volatility figure for all stock funds and exchange-traded funds over the decade ended March 31, 2025. Then I grouped those funds into five quintiles based on how volatile their monthly flows were. From there, I was interested in estimating the total and dollar-weighted returns funds in each bucket earned, on average.

What I found is the funds with the most volatile flows also had the lowest total and dollar-weighted returns while funds that had the most stable flows boasted the best returns. Moreover, the gap between funds’ total and dollar-weighted returns widened as you moved from the least-volatile to most-volatile buckets—meaning investors in heavily traded funds not only earned lower total returns, but also captured a smaller share of those returns.

This relationship held to varying degrees even when I controlled for different variables, including type of vehicle (open-end fund vs. ETF) and geographic focus (US equity versus international equity), as shown below.

Open-end Equity Funds

Equity ETFs

US Equity

International Equity

Drivers

Why did things shake out as they did? It comes down to the types of funds that make up the different quintiles. Open-end funds account for a disproportionate share of the “Least Volatile” bucket while ETFs dominate the other four quintiles. In short, equity ETFs saw heavier trading than stock funds.

In addition, though it’s less pronounced, you also find that international stock funds and ETFs had less stable flows—as evidenced by their heavier representation in the more-volatile flow buckets—than US equity funds did.

This invites the question of whether we’d see the same relationship between trading and investor outcomes if we broke the universe down by vehicle type and geographic focus.

To that end, I pulled together the data for the four combinations—US equity open-end funds, US equity ETFs, international equity open-end funds, and international equity ETFs—and plotted the results in the chart below. For brevity, the chart expresses outcomes as the ratio of investors’ estimated dollar-weighted returns to the funds’ time-weighted returns (if the former equals the latter, the “capture” percent is 100%, and so forth.

The chart makes a few things apparent. For one, the more investors traded, the less of their funds’ total returns they tended to capture, irrespective of vehicle type or geographic focus. You can see that in the way each clump of bars slopes downward. In addition, the opportunity costs of trading appear to have been steeper in ETFs in general and international equity in particular.

Conclusion

While we can’t specifically quantify how much investors traded in equity funds and ETFs, we can use the volatility of those funds’ flows to proxy trading activity. Once we classify funds on that basis and estimate their dollar- and time-weighted returns, we find that outcomes were substantially worse for investors in the funds that had the most-volatile flows than for investors in funds with stable flows. This relationship held even when we controlled for multiple variables, including vehicle type and geographic focus.

This seems to only further reinforce the case to keep trading to a minimum, even if the vehicle type affords one the ability to transact often, as is the case with ETFs. Indeed, we found that the opportunity costs of trading were larger among ETFs than open-end funds, and those costs can swamp whatever fee or other advantages such vehicles might enjoy versus comparable open-end funds.

Switched On

Here are other things I’m writing, reading, listening to, or watching:

• Wisdom: Amy Arnott on why it’s a bad idea to hit pause on your 401(k) contributions, and Christine on whether the case for bonds as diversifiers is still intact
• Buffer beef: AQR disses buffer ETFs, FT Vest claps back, I offer my $0.02
• Jason Zweig: “You might have to wait months to be able to cash out even a pittance of your private holdings. By then, the public markets may have recovered, precluding you from opportunistically rebalancing.” Yep.
• “There’s a Lesson to Learn from Daniel Kahneman’s Death”
• Tyler Cowen explores creative collaboration with Ian Leslie, author of “John and Paul: A Love Story in Songs”
• Joel: The incredible second episode of “The Last of Us”
• Gustaf “Close” and The Bug Club “Actual Pain”
• Warfare (Best urban combat flick I’ve seen since Blackhawk Down.)

Don’t Be a Stranger

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.