It has been documented that over specific time periods, a mutual fund’s dollar-weighted returns often lag the fund’s reported returns.
For example, investment researcher Morningstar keeps tracks of dollar-weighted performance to measure how the average investor fared in a fund over a period of time. The gauge incorporates the impact of cash inflows and outflows that affect the fund’s assets.
“Investor returns tend to be lower than total returns. This implies that investors tend to get into funds at the wrong time,” Morningstar said in a 2010 study.
A mutual fund’s reported returns assume a buy-and-hold strategy. However, many investors buy and sell funds in an effort to beat the market. Unfortunately, dollar-weighted returns show that much of this activity is counterproductive.
The good news is that the ability to buy and sell ETFs during the day doesn’t appear to exacerbate the problem. At Vanguard at least, ETF investors appear to be no better or no worse at timing the market, compared with mutual-fund investors. [Vanguard Indexing Guru Sauter on ETFs]
Relative to any other fund structure or investment offering “it cannot be presumed that investors will abuse the trading flexibility of ETFs to the detriment of their own returns,” Vanguard said.