Overtrading cost thematic investors finds study

Morningstar research finds investors lost out on almost two-thirds of their returns through badly timed trades

Overtrading cost thematic investors finds study

Another study seems to have validated the old mantra “time in the market beats timing the market.” According to a report by Morningstar Manager Research, investors in thematic funds lost out on almost two-thirds of those funds’ total returns due to poorly-timed trades.

Thematic funds posted an average annualized return of 7.3% in the five years from June of 2018 to June of 2023. However, investors only saw a 2.4% returns according to the Morningstar report.

These funds are focused on particular investment themes, like specific multi-sector industries or emerging technologies.

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The report attributes this delta in performance to fund investors’ poor market timing. In more volatile funds investors were found to more frequently buy high and sell low. In more targeted thematic funds, too, there was a larger returns gap. Broader themes tended to see less of an overall gap.

Investors in thematic ETFs also lost more than investors in thematic mutual funds. The report attributes this to the fact that ETFs can be used to make tactical bets. ETFs may also see more volatility from more concentrated holdings.

"Most investors would achieve better investment outcomes by adopting a more patient buy-and-hold approach," the analysis reads.

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The S&P 500 returned 14% annually on average during the same period covered.