I read a lot of financial publications and investment white papers (nerd alert!), and one I look forward to every year is the Mind The Gap study from Morningstar. This paper analyzes the universe of mutual funds and ETFs and quantifies a) the average annual total return of these funds, broken down by categories such as asset class, fees, volatility, fund flows, etc., and b) the performance of the average dollar invested in those funds over the trailing 10 years. This latter stat is the investor return, as it captures what investors actually made in these funds when factoring in cash flows in and out of each fund.
Every year I read this study, and every year I know the ending: investor returns lag fund returns across the board, and by a not insignificant margin. This lag is referred to as "the gap", and despite the title of the paper I do in fact mind it.
For the 10-year period ending 2025, the average investor return (+8.7%) was 1.2% lower than the average fund return (+9.9%). What does that mean in dollar terms? See below from Jeffrey Ptak, the author of the study (emphasis mine):
"As of Jan. 1, 2016, the open-end funds and ETFs included in the study held around $13.6 trillion in aggregate net assets. Had those assets hypothetically been left untouched, compounding at 9.9% per year until the end of the period, they’d have been worth nearly $35 trillion in aggregate. But in reality, these funds held $29.7 trillion in total as of Dec. 31, 2025, the shortfall largely explained by around $3.8 trillion in estimated timing-related effects."
There are several theories that help explain this gap, but the root cause comes down to poorly timed cash flows in and out of these funds, often driven by performance-chasing behavior amongst investors.
Funds perform well, thereby attracting assets, followed by underperformance which leads to outflows. This cycle repeats across just about every category and time period, no one has been safe not even target-date funds (as represented by the Allocation category below):
However, this year there was an exception. One style of investing actually had a "positive gap" between fund and investor returns.
Buffer ETFs.
Over the last 3- and 5-year periods, investors in these funds actually slightly outperformed the very funds in which they were investing:
The study revealed that one of the explanations for this phenomenon is how most investors actually invest in these strategies. Buffer ETFs are unique in that most are issued as monthly "vintages", meaning they have a start date and a maturity date spanning what's called a "defined outcome period," the most common of which is one year. So long as you are invested in the fund during that entire period, you receive the stated upside cap and downside protection level specific to that fund for that period. At maturity, it resets and the whole process starts over for another outcome period (the level of protection generally stays the same while the upside caps may change).
What's interesting is that due to this structure, net inflows into these funds are heavily clustered around the starting month of each vintage, with few if any net flows during the other 11 months of the year:
Investors bought. And held.
Despite all the evidence illustrating that buy-and-hold investing in growth assets like stocks can generate long-term gains, it can admittedly be difficult in challenging market environments. This data on investor behavior around the use of defined outcome investments like buffer ETFs tell us that perhaps it's easier when your investment not only has structured and knowable downside protection, but also has a maturity date.
It's too soon to tell whether this will be a durable advantage of buffer ETFs vs more traditional investments, as the 3-year gap is significantly lower than the 5-year which includes the 2022 drawdown, but the data so far is encouraging on the investor behavior within defined outcome strategies.
Brent Coggins
Chief Investment Officer, Triad Wealth Partners
Buffer ETFs carry risks distinct from traditional index funds, including but not limited to: a capped upside that may cause investors to underperform the broader market in strong years; reliance on options contracts to deliver the stated protection, which introduces counterparty and derivatives risk; generally higher expense ratios; and the requirement to hold the fund for the full defined outcome period to receive the stated protection and cap; early redemption may result in returns that differ materially from the stated terms.
This discussion is for informational purposes only and does not constitute a recommendation to invest in buffer ETFs or any other specific security or strategy.
The 'Hypothetical Buy-and-Hold Appreciation' figure is a third-party illustrative calculation by Morningstar showing what aggregate fund assets would theoretically be worth absent investor cash flows. It does not reflect the performance of any Triad Wealth Partners strategy, is not based on actual investment results, and should not be relied upon in making investment decisions.
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